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Reform or Repression: Organizing America’s Anti-Union Movement

Author(s):Pearson, Chad
Reviewer(s):Friedman, Gerald

Published by EH.Net (June 2016)

Chad Pearson, Reform or Repression: Organizing America’s Anti-Union Movement.  Philadelphia, University of Pennsylvania Press, 2016. viii + 303 pp. $55 (cloth), ISBN: 978-0-8122-4776-3.

Reviewed for EH.Net by Gerald Friedman, Department of Economics, University of Massachusetts.

Even while the Labor Movement is dying, its history thrives.  For a long time, Labor History was a narrow often sterile discipline focused on the glorious rise of unions and socialist political formations, the formal Labor Movement.  Labor History was populated by advocates whose works often read like sermons, histories of good and honest workers struggling against evil capitalists and their political toadies.  Strikes and unions were good, except where the earnest rank-and-file were betrayed by self-serving union leaders.  Sometimes, these betrayals cost the workers.  But the experience of collective action and struggle always contained good lessons, and task of the labor historian was seen as interpreting these lessons and passing them along to build the labor movement.

While labor historians imagined placing workers and their struggles at the center of historical analysis, by reducing capital, the state, and labor to simplistic Marxist elements, their work was consigned to a leftist ghetto.  Labor History as medieval morality play can contribute little to the broader study of history because it treats all actors as parodies. Ironically, by shrinking all social actors to a simplistic category, this work brought nothing to the understanding of the labor movement or the proper strategy for labor struggles.  In the face of the decline, even the collapse, of the Labor Movement, the old Labor History has had nothing to say except the old mantra of “evil capitalists” and “self-serving union leaders.”

Perhaps it is the crisis of the Labor Movement that has invigorated the field of Labor History.  A new generation of historians has emerged conscious that the old categories are inadequate to understand the current crisis.  They are ready for a much more nuanced approach, one that recognizes the varieties of capital. The experience of the Labor Movement’s rise and decline has forced them to recognize the often-contentious relationship between capital and democratic states, and the role of ideology in shaping not only the Labor Movement, but the response to labor militancy by states and by capitalists.  In short: the new generation recognizes that the making of the capitalist class and any capitalist state is just as challenging as the making of the working class.  By conceiving labor history as a history of contending collective movements, labor historians have enriched our understanding of American employers and their organizations (Ernst 1995; Harris 2006), their bargaining strategies and campaigns against unions (Richards 2008; Sidorick 2009; Cowie 1999), their often-tangled relationship with state officials (Howell 1992; Howell 2005; Friedman 1998; Friedman 2007), and the ideology they developed to sustain their collective action (Phillips-Fein 2009; Harris 1982; Leon 2015).  At its best, this new labor history is contributing, as labor historians have long wanted, to a broader emerging field of the history of capitalism (Beckert 2014).

Chad Pearson’s new book should be seen in the context of this transformation of Labor History into a piece of the larger history of American capitalism. His book uses brief biographies and case studies of local associations to examine the development of the Open Shop movement in American industry before the First World War.  (“Open Shops” are establishments that hire workers without regard for their union membership; in practice, they do not hire union members because they do not sign union contracts.)  In particular, Pearson addresses a question that has often appeared as a paradox to liberal historians eager to portray the American story as a march of progress: the coincidence, both in time and often in personnel, between the Progressive Era “Age of Reform” and the rise of militant anti-unionism and the repression of labor organization.  How to reconcile the seemingly antagonistic positions of progressive reformers like George Creel, who advocated of women’s suffrage, public ownership of utilities, and opposed child labor, while also campaigning for the Open Shop and serving on Citizen’s Industrial Association of America (CIAA) press committee (Pearson 2016, 70)?  What to say of Theodore Roosevelt, bitter critic of both the repressive labor policies of the Anthracite Coal companies and of the closed (union) shop?  Or the liberal hero, Louis Brandeis, who argued that the open shop protected the liberties of both employers and the rights of meritorious unionists and nonunionists alike (Pearson 2016, 83)?

It is the great strength of Pearson’s study that regardless of any personal sympathy with unions and labor militancy, he avoids any cant but evaluates seriously the positions of open-shop employers.  He shows that they, too, were often reformers and their employers’ movement was as much a part of the Progressive Era as was the Labor Movement. In rejecting labor militancy and the closed shop as incompatible with his vision of America’s political traditions, Brandeis, for example, expressed a view of labor relations and the economy that was championed by Progressive Era employers’ organizations, has remained popular in America, and has come to motivate much of our political right.  In this view, free Labor has no social dimension.  It means simply the right of individuals to conduct their businesses and to buy and sell commodities, including their own labor power, untrammeled by the interference of others, either state regulators or other workers or businesses.  An attribute of individuals, freedom is negated by collective action.  Not only does free competition among individuals best promote efficiency, it is fair because it rewards work and merit; and it is just because it represents liberty. Labor unions are a threat to efficiency because they place the lazy and incompetent on equal standing with the hard-working and meritorious.  Worse, through their political action, by promoting regulation and monopoly, they are a fundamental threat to freedom, “the greatest menace” (Pearson 2016, 182).  Far from a selfish battle to increase profits, the campaign for the open shop and the employer in the management of his property, was a noble and generous struggle to protect fundamental principles of justice and fairness.

If the open-shop activists had a general political orientation, Pearson shows that, paradoxically for many historians, it was liberal and progressive rather than reactionary.  Open shop proponents did not see themselves as part of a counter reformist movement; instead, they were part of a tradition of social reform that stretched back to the abolitionists and early Republicans, to Abraham Lincoln rather than Jefferson Davis.  They saw themselves as heirs to the abolitionists, reformers, patriotic and class-neutral proponents of industrial fairness and guardians of ambitious, hard-working individuals. It was natural then for them to oppose monopoly, to favor honest government, municipal efficiency, industrial progress and professionalization. Far from fighting against labor or higher wages, they often condemned abusive managers (like the Anthracite Coal companies), and favored welfare capitalist initiatives and what labor economists today call efficiency wages.

It would be a cheap shot at the open-shop activists to observe that their campaign in defense of individual liberty against collective regulation required collective action, “employer solidarity” and individual sacrifices to benefit the group.  Indeed, their campaigns were often undermined by the actions of self-interested individuals, employers who displayed an inclination not to “give their time to anything that will further the interests of the group. (Pearson 2016, 160, 162).  Like their union opponents, employers’ organizations face a collective action problem, the need to mobilize individual resources to produce public goods. Pearson’s greatest contribution is to show how these organizations addressed this problem, and how they used ideas — the ideology of individual liberty — to mobilize their constituents.  What socialism was for the working-class movement, progressivism became for America’s employers.

Pearson’s work should be read and read carefully by all interested in the history of the Progressive Era, the history of employer organizations, and American political thought.  His work is Labor History in the broadest and finest sense, the history of the development of American capitalist society.

References:

Beckert, Sven. 2014. Empire of Cotton: A Global History. New York: Knopf.

Cowie, Jefferson. 1999. Capital Moves: RCA’s Seventy-Year Quest for Cheap Labor. Ithaca: Cornell University Press.

Ernst, Daniel R. 1995. Lawyers against Labor: From Individual Rights to Corporate Liberalism. The Working Class in American History. Urbana: University of Illinois Press.

Friedman, Gerald. 1998. State-Making and Labor Movements: France and the United States, 1876-1914. Ithaca: Cornell University Press.

Friedman, Gerald. 2007. Reigniting the Labor Movement: Restoring Means to Ends in a Democratic Labor Movement. Abingdon, UK: Routledge.

Harris, Howell John. 1982. The Right to Manage: Industrial Relations Policies of American Business in the 1940s. Madison University of Wisconsin Press.

Harris, Howell John. 2006. Bloodless Victories: The Rise and Fall of the Open Shop in the Philadelphia Metal Trades, 1890-1940. New York: Cambridge University Press.

Howell, Chris. 1992. Regulating Labor: The State and Industrial Relations Reform in Postwar France. Princeton: Princeton University Press.

Howell, Chris. 2005. Trade Unions and the State: The Construction of Industrial Relations Institutions in Britain, 1890-2000. Princeton: Princeton University Press.

Leon, Cedric de. 2015. The Origins of Right to Work: Antilabor Democracy in Nineteenth-Century Chicago. Ithaca: ILR Press/Cornell University Press.

Pearson, Chad. 2016. Reform or Repression: Organizing America’s Anti-Union Movement. American Business, Politics, and Society. Philadelphia: University of Pennsylvania Press.

Phillips-Fein, Kim. 2009. Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan. New York: W. W. Norton.

Richards, Lawrence. 2008. Union-Free America: Workers and Antiunion Culture. The Working Class in American History. Urbana: University of Illinois Press.

Sidorick, Daniel. 2009. Condensed Capitalism: Campbell Soup and the Pursuit of Cheap Production in the Twentieth Century. Ithaca: ILR Press/Cornell University Press.

Jerry Friedman has served as the U.S. editor of Labor History since 2003.

Copyright (c) 2016 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 (June 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Business History
Labor and Employment History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Technological Innovation in Retail Finance: International Historical Perspectives

Author(s):Bátiz-Lazo, Bernardo
Maixé-Altés, J. Carles
Thomes, Paul
Reviewer(s):Wardley, Peter

Published by EH.Net (November 2013)

Bernardo Bátiz-Lazo, J. Carles Maixé-Altés, and Paul Thomes, editors, Technological Innovation in Retail Finance: International Historical Perspectives. New York: Routledge, 2011.
xvi + 319 pp.  £85/$125 (hardback), ISBN: 978-0-415-88067-1.

Reviewed for EH.Net by Peter Wardley, Department of History, Philosophy and Politics, University of the West of England (Bristol).

Until recently there was a largely unbridged historiographic divide between monetary historians, interested largely in stories about monetary aggregates, economic performance and financial policy, and bank historians, authors of scholarly texts that recount the origins, growth and, on occasion, the demise, of specific financial institutions. However, over the last three decades this separation has been to some extent diminished, prompted in part by research that focuses on the application and organization of new technology in financial institutions. In part, this is a result of a widespread familiarity with personal computers along with a growing awareness of the importance of the role of information technology throughout the modern economy. More specifically, it has become increasingly apparent to those outside the financial sector that the processing of information within financial institutions is a major and dynamic factor that should not be neglected. If one of the earliest and most advertised events in this process was the “Big Bang,” that transformed the nature of business on the London Stock Exchange in October 1986, then the “Global Financial Crisis” of 2007-08 demonstrated the extent and significance of international networks that knit together the world’s financial institutions. In this environment, academic interest in the internal structures of banks has increased and analysis of the adoption and organization of information technology in the financial sector, previously almost unheard of, is now well-established. It is in this context that this edited collection makes a novel and valuable contribution by providing a comparative study of technological change in European and North American retail finance.

An editorial introduction, entitled “In Digital We Trust,” provides an enthusiastic and detailed justification for the study of the introduction and usage of information and telecommunication technology (ICT) in the financial sector. This stresses the evolutionary and contingent nature of the diffusion of ICT within financial institutions which varied according to the greatly differing environments that differed by the market segment they operated in, the economic circumstances they faced, and the social, legal, political and cultural settings in which they developed. However, a general pattern emerges in the largely hard-headed and realistic approach adopted by the managers who were responsible for the acquisition and productive use of new machines and applications; often the technology led to the adaptation of existing methods rather than the adoption of completely new managerial practices. As the twentieth century saw a sequence of technological innovations, which were largely incremental and adaptive in nature, for the most part a long term perspective is taken here. This recognizes the initial adoption of mechanical aids in the banking parlor (for example, the typewriter and telephone), then the employment of data recording instruments (adding machines) which was followed by increasingly complex data recording and processing machines (accounting machines, first powered manually and then by electricity). Computers of various types, from mainframe to micro, have been the most recent manifestation of this technological progression that depended on co-developed theoretical and scientific advances which have both sped up processing and increased memory capacity, approximately according to Moore’s law, at costs that have correspondingly diminished. The nature of this technological progression, as evident in the banking industry, is competently discussed in Lars Heide’s concluding chapter which might usefully be read as a guide to much that appears in the preceding chapters.

First, though, a note of caution. There was a major characteristic of retail finance, one that is really important in the first half of the twentieth century, the pre-mainframe era, which might not immediately strike readers who are more accustomed to the banking system of the United States which should have been more emphatically indicated here. In the U.S. the relatively small, single unit bank adopted mechanization in order to process the widest range of functions, from recording personal statements associated with the accounts of individuals to the assessment of the aggregate financial position of the bank. In Europe, and notably in England’s “Big Five” High Street banks, the relatively much larger, multi-unit branched bank tended to undertake these two distinct operations at different locations; the former at the branch and the latter at the bank’s head office. Once recognized, this fundamental distinction explains a great deal about the different rates and patterns of technological adoption and diffusion experienced across retail banking systems in different countries. Different technologies could be used for different purposes but similar technology could also be adopted in other environments to do different tasks. And, of course, there was some path dependency within systems that, for example, linked the adoption of mainframe computer systems after 1950 to the prior implementation of pre-World War II bank mechanization. Here it is interesting to note, at least in the British setting, that the staff associated with computerization do not appear to have learned as much as one might have expected from the experiences of their predecessors, the generation of then recently retired senior bank managers, who it might be argued had been more successful in the interwar years in introducing new technology. The evidence suggests that these pioneers appear to have a much clearer understanding of one the themes of this book: the machine had to serve the bank rather than dictate a radical recasting of organizational practices. These themes appear prominently in chapters here that provide national case-studies.

Martha Poon’s account of the transformation of the credit risk calculations provided by the Fair Isaac Scorecard system highlights the significance of gender, a factor that is less prominent in the chapters presented here than it might be. In her story, before the introduction of electronic system, credit applications were “put-out” as raw data to local housewives who produced coded reports which were then processed by female operators of key punching machines to be coded. Even with the consolidation of a more completely office-based, machine-driven system of data processing, important “heritage” aspects, residual remnants of past practices, now deeply embedded in the calibration of the credit of individual consumers, persisted even as credit scoring became increasingly digitalized and automated. By contrast, women play no visible role in Joakim Appelquist’s study of “Technical and Organizational Change in Swedish Banking, 1975-2003,” which begs the obvious question about the nature of gender (in)equalities in Nordic society. This chapter provides an explicitly specified model whereby the adoption of different generations of ICT, from mainframe to internet via PC-based LANS, correspond with stages of a shift from Tayloristic bureaucracies to post-Taylorisitic organizations “characterized by flattened management structures, outsourcing, etc.” (p. 74). However, rather than the de-skilling of the labor force in a period of new technology adoption, à la Braverman, Appelquist argues that Swedish banks re-skilled their staff either by re-training existing workers or by substituting existing employees with replacements who were better equipped to deliver personal banking services of a more skilled nature.

Joke Mooij provides an exemplary account of the adaptation of new managerial structures and adoption of novel technologies that accompanied the consolidation in 1972 of the Rabobank Nederland (Coöperatieve Centrale Raiffeisen-Boerenleenbank), one of the world’s largest banks; this was achieved by the consolidation of two agricultural co-operative banks that had used earlier machinery within distinctive corporate cultures. Both had shared an initial commitment to Raiffeisen principles, one of which stipulated unsalaried management that made them very different from contemporary Anglo-Saxon co-operative enterprises, and faced challenges with respect to this defining characteristic caused by the technological and organizational changes narrated here.

Bernardo Bátiz-Lazo and J. Carles Maixé-Altés provide a comparative assessment of ICT adoption in a different “non-standard” corporate institution, the Savings Bank, by providing an historical evaluation of their development in Britain and Spain between 1950 and 1985; here they contrast the achievement in Spain of economies of scope, in the form of product portfolio, with the search for economies of scale in Britain. In both stories political factors are demonstrated to be significant though different in character. In Spain collaboration in the acquisition and operation of ICT shared by locally orientated, and sometimes relatively small, members of the Confederation of Spanish Savings Banks (La Confederación Española Cajas de Ahorros, or CECA) allowed the associated development of distinct regionally-based institutions, each of which grew a clearly defined profile in its community.  This was far removed from the British experience. There, after over one hundred and seventy-five years of relative success in providing deposit facilities for inhabitants of their respective neighborhoods, and especially to the comparatively poor, the British state in the 1970s herded together seventy-five semi-autonomous Trustee Savings Banks into a single entity, the Trustee Savings Bank (TSB) that was subsequently floated on the London Stock Exchange in 1986. Unsurprisingly, the philanthropic motives of the pioneers of the TSB movement and the local orientation of each TSB were lost to history and within a decade the TSB was the subject of a “reverse-takeover” by Lloyds Bank. Nevertheless, the TSB has re-emerged recently when, at the insistence of the European Commission in 2012, its divestment was made a condition of the British state’s rescue package to salvage Lloyds Bank; however, the inaugurating publicity of the TSB Bank (sic) did not suggest that the re-emergence of a community-orientated financial institution devoted to the needs of the less well-off was imminent.

The role of the British state is also revealed by Alan Booth and Mark Billings in their assessment of “Techno-Nationalism, the Post Office and the Creation of Britain’s National Giro,” which documents the creation of “very curious beast indeed” (p. 171). In addition to attempts by the British state to foster an indigenous computer-building industry, a persistent theme of the 1960s and 1970s, which could be generalized to encompass even more long-standing and recurrent policies to stimulate “high-tech” manufacturing in Britain, this evidences a political divide between the two parties that formed governments in the two decades before 1979. First, after the Radcliffe Committee Report of 1957, the Conservative administration saw in a Giro system a handy tool to nudge the commercial banks such that they became more responsive to the needs of the economy and more willing to address the shortcomings of their business behavior. Thereafter, Tony Benn, as Post Master General and then as Minister of Technology, in a Labour government whose leader had lauded the benefits of a scientifically informed transformation of society, supported the Giro as a prominent IT project within the nationalized sector of the economy that could contribute to this objective. However, the history of the Giro demonstrates a number of problematic features of this policy, including the difficulties of obtaining new technological capabilities which were embodied in imported equipment at a time when Britain suffered from recurrent Sterling problems and public spending difficulties.

Public perceptions of technical change in the financial sector have always been important and senior bank officials watched keenly the response of their customers, first to mechanization in the interwar years and later to computerization. As Ian Martin documents in “Britain’s First Computer Centre for Banking: What Did This Building Do?”, Barclays Bank was eager to shape public opinion in 1961 when it opened its No.1 Computer Centre near Euston station in London. However successful Barclays was in persuading its customers of the merits and advantages of its innovative strategy, and contrary to the case presented here, this was not first time that customer accounting in Britain had been dislocated “from its traditional confines of the individual bank branch” to be relocated to a centralized facility. This had been achieved, in association with a very similar publicity campaign to that narrated here, by the Westminster Bank some thirty years earlier (Wardley, 2000). As this strategy was dependent upon the comprehensive mechanization of record keeping at its Head Offices (at Lothbury, hard by the Bank of England), readers should also treat with caution Martin’s associated statement that “British banks, with the exception of the Bank of Scotland …, did not make use of tabulating machines to perform centralised branch accounting” (p. 37). The Bank of Scotland, as with other banks in Scotland, was a laggard in this respect; in England, even the Co-operative Bank had mechanized by 1935.

Hubert Bonin’s “Mechanization of Data Processing and Accounting Methods in French Banks, circa 1930-1950” provides an excellent survey of the mechanizing bank that reviews the introduction of tabulators, accounting machines and electromechanical data processors in the context of financial organizations that adopted and continually adapted technical capabilities that reflected existing procedures and dynamic managerial strategies. Here new technology is always the handmaiden of “streamlining” that saw recurrent rounds of re-organization and standardization of information within banks. Bonin also identifies the extensive and eager exchange of information about mechanization among French banks, a tendency shared by contemporary English banks. However, and English contemporaries might have been surprised by its omission here, in France the formation of the Comité Permanent d’Organisation Bancaire in 1930 saw a collective agency created to encourage increased efficiency through information exchange concerning mechanization, more effective work organization, improved clearing arrangements and better statistics and costing data. Paul Thomes responds affirmatively to the question “Is There an ICT Path in the German Savings Banking Industry? (c. 1900-1970s)” by evidencing the recurrent pioneering role of savings banks relative to technology adoption both by Germany’s large commercial banks and by the co-operative banks that served both SMEs and agricultural enterprises. Some additional interesting questions are prompted by this chapter: how was it that German banks were able to introduce machine bookkeeping during the First World War and increase mechanization in World War Two when in Britain such resources were very deliberately directed by the state to military purposes? Why was it that the Banque d’Alsace-Lorraine so quickly came to correspond to the French pattern described by Bonin rather than the “IT path” that Thomes presents for German banks? What is more certain is that a contemporary bank manager would have recognized a near 100% enhancement of the claimed productivity benefits had a hardware salesman suggested to him that “a machine-booking clerk could manage 500 entries a day against 180 done by hand: an efficiency gain of nearly 300 percent” (p. 124). Unfortunately, not only is this calculation wrong but it is one of the few examples provided in this collection of an explicit assessment of the gains, expected or realized, attributable to the introduction of new technology.

Although not the major subject of this collection, technological developments are prominent in some chapters; these include Juan Pablo Pardo-Guerra’s micro history of the successive stages of automation that delivered digitalization at the London Stock Exchange and David Stearn’s account of the iterative responses implemented by Visa to meet technical and organizational challenges of implementing a global consumer payment card system. Mexico provides the setting for Gustavo Del Ángel-Mobarak‘s study of the evolution of interbank connectivity though the use of ICT by its banks after 1965 which, despite an interlude of public ownership, once more illustrates a number of general themes. A novel and distinctive development here demonstrates the long term and continuing nature of technical change in banking; as early as 1934 wireless radio transmitters were used to transfer information between corporate headquarters and branches within Mexico City and this system was nation-wide within a decade.

Overall, this innovative anthology serves to remind that two polar positions can be discerned in studies that assess the impact of new technology. On the one hand, the adoption of novel devices can be captured by a “Gee whiz” response that emphasizes a dramatic break with past practices. Its polar opposite, by contrast, emphasizes long-run continuities and incremental developments. In this examination of technical innovation in the banking sector we find elements of both though generally the evidence presented affirms strongly the “slowly but surely” approach that one would expect from bankers who are often regarded as natural conservatives until the public is sharply reminded that risk-taking is a day-to-day activity for financiers. However, here it might also be noted that in this text at least two essential factors do not get the attention they probably deserve: one is a consideration of cost-benefit analysis of the adoption of new technology, both in terms of the net savings aspired to and the reduction in costs actually achieved; the other is gender: the employment of female staff is a basic characteristic, if not universal feature, of technological change in the financial sector and less attention than is warranted is devoted to gender-related considerations.

Peter Wardley was editor of the annual review of IT for the Economic History Review (1990-95) and has written several articles and chapters on economic and business history. Among those relating to banking history are “The Commercial Banking Industry and Its Part in the Emergence and Consolidation of the Corporate Economy in Britain before 1940,” Journal of Industrial History, 3 (2000) 71-97 (see JIH 3 3 Wardley 2000 Banks low res) and “Women, Mechanization and Cost-savings in Twentieth-century British Banks and Other Financial Institutions” in Mike Richardson and Peter Nicholls, eds. (2011) A Business and Labour History of Britain: Case Studies of Britain in the Nineteenth and Twentieth Centuries.

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 (November 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

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

History of Property Taxes in the United States

Glenn W. Fisher, Wichita State University (Emeritus)

Taxes based on ownership of property were used in ancient times, but the modern tax has roots in feudal obligations owned to British and European kings or landlords. In the fourteenth and fifteenth century, British tax assessors used ownership or occupancy of property to estimate a taxpayer’s ability to pay. In time the tax came to be regarded as a tax on the property itself (in rem). In the United Kingdom the tax developed into a system of “rates” based on the annual (rental) value of property.

The growth of the property tax in America was closely related to economic and political conditions on the frontier. In pre-commercial agricultural areas the property tax was a feasible source of local government revenue and equal taxation of wealth was consistent with the prevailing equalitarian ideology.

Taxation in the American Colonies

When the Revolutionary War began, the colonies had well-developed tax systems that made a war against the world’s leading military power thinkable. The tax structure varied from colony to colony, but five kinds of taxes were widely used. Capitation (poll) taxes were levied at a fixed rate on all adult males and sometimes on slaves. Property taxes were usually specific taxes levied at fixed rates on enumerated items, but sometimes items were taxed according to value. Faculty taxes were levied on the faculty or earning capacity of persons following certain trades or having certain skills. Tariffs (imposts) were levied on goods imported or exported and excises were levied on consumption goods, especially liquor.

During the war colonial tax rates increased several fold and taxation became a matter of heated debate and some violence. Settlers far from markets complained that taxing land on a per-acre basis was unfair and demanded that property taxation be based on value. In the southern colonies light land taxes and heavy poll taxes favored wealthy landowners. In some cases, changes in the tax system caused the wealthy to complain. In New York wealthy leaders saw the excess profits tax, which had been levied on war profits, as a dangerous example of “leveling tendencies.” Owners of intangible property in New Jersey saw the tax on intangible property in a similar light.

By the end of the war, it was obvious that the concept of equality so eloquently stated in the Declaration of Independence had far-reaching implications. Wealthy leaders and ordinary men pondered the meaning of equality and asked its implications for taxation. The leaders often saw little connection among independence, political equality, and the tax system, but many ordinary men saw an opportunity to demand changes.

Constitutionalizing Uniformity in the Nineteenth Century

In 1796 seven of the fifteen states levied uniform capitation taxes. Twelve taxed some or all livestock. Land was taxed in a variety of ways, but only four states taxed the mass of property by valuation. No state constitution required that taxation be by value or required that rates on all kinds of property be uniform. In 1818, Illinois adopted the first uniformity clause. Missouri followed in 1820, and in 1834 Tennessee replaced a provision requiring that land be taxed at a uniform amount per acre with a provision that land be taxed according to its value (ad valorem). By the end of the century thirty-three states had included uniformity clauses in new constitutions or had amended old ones to include the requirement that all property be taxed equally by value. A number of other states enacted uniformity statutes requiring that all property be taxed. Table 1 summarizes this history.

Table 1 Nineteenth-Century Uniformity Provisions

(first appearance in state constitutions)

Year

Universality Provision

Illinois

1818

Yes

Missouri

1820

No

*Tennessee1

1834

Yes2

Arkansas

1836

No

Florida

1838

No

*Louisiana

1845

No

Texas

1845

Yes

Wisconsin

1848

No

California

1849

Yes

*Michigan3

1850

No

*Virginia

1850

Yes4

Indiana

1851

Yes

*Ohio

1851

Yes

Minnesota

1857

Yes

Kansas

1859

No

Oregon

1859

Yes

West Virginia

1863

Yes

Nevada

1864

Yes5

*South Carolina

1865

Yes

*Georgia

1868

No

*North Carolina

1868

Yes

*Mississippi

1869

Yes

*Maine

1875

No

*Nebraska

1875

No

*New Jersey

1875

No

Montana

1889

Yes

North Dakota

1889

Yes

South Dakota

1889

Yes

Washington

1889

Yes

Idaho6

1890

Yes

Wyoming

1890

No

*Kentucky

1891

Yes

Utah

1896

Yes

*Indicates amendment or revised constitution.

1. The Tennessee constitution of 1796 included a unique provision requiring taxation of land to be uniform per 100 acres.
2. One thousand dollars of personal property and the products of the soil in the hands of the original producer were exempt in Tennessee.
3. The Michigan provision required that the legislature provide a uniform rule of taxation except for property paying specific taxes.
4. Except for taxes on slaves.
5. Nevada exempted mining claims.
6. One provision in Idaho requires uniformity as to class, another seems to prescribe uniform taxation.
Source: Fisher (1996) 57

The political appeal of uniformity was strong, especially in the new states west of the Appalachians. A uniform tax on all wealth, administered by locally elected officials appealed to frontier settlers many of whom strongly supported the Jacksonian ideas of equality, and distrusted both centralized government and professional administrators.

The general property tax applied to all wealth — real and personal, tangible and intangible. It was administrated by elected local officials who were to determine the market value of the property, compute the tax rates necessary to raise the amount levied, compute taxes on each property, collect the tax, and remit the proceeds to the proper government. Because the tax was uniform and levied on all wealth, each taxpayer would pay for the government services he or she enjoyed in exact proportion to his wealth.

The tax and the administrative system were well adapted as a revenue source for the system of local government that grew up in the United States. Typically, the state divided itself into counties, which were given many responsibilities for administering state laws. Citizens were free to organize municipalities, school districts, and many kinds of special districts to perform additional functions. The result, especially in the states formed after the Revolution, was a large number of overlapping governments. Many were in rural areas with no business establishment. Sales or excise taxes would yield no revenue and income taxes were not feasible.

The property tax, especially the real estate tax, was ideally suited to such a situation. Real estate had a fixed location, it was visible, and its value was generally well known. Revenue could easily be allocated to the governmental unit in which the property was located.

Failure of the General Property Tax

By the beginning of the twentieth century, criticism of the uniform, universal (general) property tax was widespread. A leading student of taxation called the tax, as administered, one of the worst taxes ever used by a civilized nation (Seligman, 1905).

There are several reasons for the failure of the general property tax. Advocates of uniformity failed to deal with the problems resulting from differences between property as a legal term and wealth as an economic concept. In a simple rural economy wealth consists largely of real property and tangible personal property — land, buildings, machinery and livestock. In such an economy, wealth and property are the same things and the ownership of property is closely correlated with income or ability to pay taxes.

In a modern commercial economy ownership and control of wealth is conferred by an ownership of rights that may be evidenced by a variety of financial and legal instruments such as stocks, bonds, notes, and mortgages. These rights may confer far less than fee simple (absolute) ownership and may be owned by millions of individuals residing all over the world. Local property tax administrators lack the legal authority, skills, and resources needed to assess and collect taxes on such complex systems of property ownership.

Another problem arose from the inability or unwillingness of elected local assessors to value their neighbor’s property at full value. An assessor who valued property well below its market value and changed values infrequently was much more popular and more apt to be reelected. Finally the increasing number of wage-earners and professional people who had substantial incomes but little property made property ownership a less suitable measure of ability to pay taxes.

Reformers, led by The National Tax Association which was founded in 1907, proposed that state income taxes be enacted and that intangible property and some kinds of tangible personal property be eliminated from the property tax base. They proposed that real property be assessed by professionally trained assessors. Some advocated the classified property tax in which different rates of assessment or taxation was applied to different classes of real property.

Despite its faults, however, the tax continued to provide revenue for one of the most elaborate systems of local government in the world. Local governments included counties, municipalities of several classes, towns or townships, and school districts. Special districts were organized to provide water, irrigation, drainage, roads, parks, libraries, fire protection, health services, gopher control, and scores of other services. In some states, especially in the Midwest and Great Plains, it was not uncommon to find that property was taxed by seven or eight different governments.

Overlapping governments caused little problem for real estate taxation. Each parcel of property was coded by taxing districts and the applicable taxes applied.

Reforming the Property Tax in the Twentieth Century

Efforts to reform the property tax varied from state to state, but usually included centralized assessment of railroad and utility property and exemption or classification of some forms of property. Typically intangibles such as mortgages were taxed at lower rates, but in several states tangible personal property and real estate were also classified. In 1910 Montana divided property into six classes. Assessment rates ranged from 100 percent of the net proceeds of mines to seven percent for money and credits. Minnesota’s 1913 law divided tangible property into four classes, each assessed at a different rate. Some states replaced the town or township assessors with county assessors, and many created state agencies to supervise and train local assessors. The National Association of Assessing Officers (later International Association of Assessing Officers) was organized in 1934 to develop better assessment methods and to train and certify assessors.

The depression years after 1929 resulted in widespread property tax delinquency and in several states taxpayers forcibly resisted the sale of tax delinquent property. State governments placed additional limits on property tax rates and several states exempted owner-occupied residence from taxation. These homestead exemptions were later criticized because they provided large amounts of relief to wealthy homeowners and disproportionally reduced the revenue of local governments whose property tax base was made up largely of residential property.

After World War II many states replaced the homestead exemption with state financed “circuit breakers” which benefited lower and middle income homeowners, older homeowners, and disabled persons. In many states renters were included by provisions that classified a portion of rental payments as property taxes. By 1991 thirty-five states had some form of circuit breakers (Advisory Commission on Intergovernmental Relations, 1992, 126-31).

Proponents of the general property tax believed that uniform and universal taxation of property would tend to limit taxes. Everybody would have to pay their share and the political game of taxing somebody else for one’s favorite program would be impossible. Perhaps there was some truth in this argument, but state legislatures soon began to impose additional limitations. Typically, the statutes authorizing local government to impose taxes for a particular purpose such as education, road building, or water systems, specified the rate, usually stated in mills, dollars per hundred or dollars per thousand of assessed value, that could be imposed for that purpose.

These limitations provided no overall limit on the taxes imposed on a particular property so state legislatures and state constitutions began to impose limits restricting the total rate or amount that could be imposed by a unit of local government. Often these were complicated to administer and had many unintended consequences. For example, limiting the tax that could be imposed by a particular kind of government sometime led to the creation of additional special districts.

During World War II, state and local taxes were stable or decreased as spending programs were cut back because of decreased needs or unavailability of building materials or other resources. This was reversed in the post-war years as governments expanded programs and took advantage of rising property value to increase tax collections. Assessment rose, tax rates rose, and the newspapers carried stories of homeowners forced to sell their homes because of rising taxes

California’s Tax Revolt

Within a few years the country was swept by a wave of tax protests, often called the Tax Revolt. Almost every state imposed some kind of limitation on the property tax, but the most widely publicized was Proposition 13, a constitutional amendment passed by popular vote in California in 1978. This proved to be the most successful attack on the property tax in American history. The amendment:

1. limited property taxes to one percent of full cash value

2. required property to be valued at its value on March 1, 1975 or on the date it changes hands or is constructed after that date.

3. limited subsequent value adjustment in value to 2 percent per year or the rate of inflation, whichever is lesser.

4. prohibited the imposition of sales or transaction taxes on the sale of real estate.

5. required two-thirds vote in each house of the legislature to increase state taxes

and a two-thirds vote of the electorate to increase or add new local taxes.

This amendment proved to be extremely difficult to administer. It resulted in hundreds of court cases, scores of new statutes, many attorney generals’ opinions and several additional amendments to the California constitution. One of the amendments permits property to be passed to heirs without triggering a new assessment.

In effect Proposition 13 replaced the property tax with a hybrid tax based on a property’s value in 1975 or the date it was last transferred to a non-family member. These values have been modified by annual adjustments that have been much less than the increase in the market value of the property. Thus it has favored the business or family that remains in the same building or residence for a long period of time.

Local government in California seems to have been weakened and there has been a great increase in fees, user charges, and business taxes. A variety of devices, including the formation of fee-financed special districts, have been utilized to provide services.

Although Proposition 13 was the most far-reaching and widely publicized attempt to limit property taxes, it is only one of many provisions that have attempted to limit the property tax. Some are general limitations on rates or amounts that may be levied. Others provide tax benefits to particular groups or are intended to promote economic development. Several other states adopted overall limitations or tax freezes modeled on Proposition 13 and in addition have adopted a large number of provisions to provide relief to particular classes of individuals or to serve as economic incentives. These include provisions favoring agricultural land, exemption or reduced taxation of owner-occupied homes, provisions benefiting the poor, veterans, disabled individuals, and the aged. Economic incentives incorporated in property tax laws include exemptions or lower rates on particular business or certain types of business, exemption of the property of newly established businesses, tax breaks in development zones, and earmarking of taxes for expenditure that benefit a particular business (enterprise zones).

The Property Tax Today

In many states assessment techniques have improved greatly. Computer assisted mass appraisal (CAMA) combines computer technology, statistical methods and valve theory to make possible reasonably accurate property assessments. Increases in state school aid, stemming in part from court decisions requiring equal school quality, have increased the pressure for statewide uniformity in assessment. Some states now use elaborate statistical procedures to measure the quality and equality of assessment from place to place in the state. Today, departures from uniformity come less from poor assessment than from provision in the property tax statutes.

The tax on a particular property may depend on who owns it, what it is used for, and when it last sold. To compute the tax the administrator may have to know the income, age, medical condition, and previous military service of the owner. Anomalies abound as taxpayers figure out ways to make the complicated system work in their favor. A few bales of hay harvested from a development site may qualify it as agricultural land and enterprise zones, which are intended to provide incentive for development in poverty-stricken areas, may contain industrial plants, but no people — poverty stricken or otherwise.

The many special provision fuel the demand for other special provisions. As the base narrows, the tax rate rises and taxpayers become aware of the special benefits enjoyed by their neighbors or competitors. This may lead to demands for overall tax limitations or to the quest for additional exemptions and special provisions.

The Property Tax as a Revenue Source during the Twentieth Century

At the time of the 1902 Census of Government the property tax provided forty-five percent of the general revenue received by state governments from their own sources. (excluding grants from other governments). That percentage declined steadily, taking its most precipitous drop between 1922 and 1942 as states adopted sales and income taxes. Today property taxes are an insignificant source of state tax revenue. (See Table 2.)

The picture at the local level is very different. The property tax as a percentage of own-source general revenue rose from 1902 until 1932 when it provided 85.2 percent of local government own-source general revenue. Since that time there has been a significant gradual decline in the importance of local property taxes.

The decline in the revenue importance of the property tax is more dramatic when the increase in federal and state aid is considered. In fiscal year 1999, local governments received 228 billion in property tax revenue and 328 billion in aid from state and federal governments. If current trends continue, the property tax will decline in importance and states and the federal government will take over more local functions, or expand the system of grants to local governments. Either way, government will become more centralized.

Table 2

Property Taxes as a Percentage of Own-Source General Revenue, Selected Years

______________________________
Year State Local
______________________________
1902 45.3 78.2
1913 38.9 77.4
1922 30.9 83.9
1932 15.2 85.2
1942 6.2 80.8
1952 3.4 71.0
1962 2.7 69.0
1972 1.8 63.5
1982 1.5 48.0
1992 1.7 48.1
­­1999 1.8 44.6
_______________________________

Source: U. S. Census of Governments, Historical Statistics of State and Local Finance, 1902-1953; U. S. Census of Governments, Governments Finances for (various years); and http://www.census.gov.

References

Adams, Henry Carter. Taxation in the United States, 1789-1816. New York: Burt Franklin, 1970, originally published in 1884.

Advisory Commission on Intergovernmental Relations. Significant Features of Fiscal Federalism, Volume 1, 1992.

Becker, Robert A. Revolution, Reform and the Politics of American Taxation. Baton Rouge: Louisiana State University Press, 1980.

Ely, Richard T. Taxation in the American States and Cities. New York: T. Y. Crowell & Co, 1888.

Fisher, Glenn W. The Worst Tax? A History of the Property Tax in America. Lawrence: University Press of Kansas, 1996.

Fisher, Glenn W. “The General Property Tax in the Nineteenth Century: The Search for Equality.” Property Tax Journal 6, no. 2 ((1987): 99-117.

Jensen, Jens Peter. Property Taxation in the United States. Chicago: University of Chicago Press, 1931.

Seligman, E. R. A. Essays in Taxation. New York: Macmillan Company, 1905, originally published in 1895.

Stocker, Frederick, editor. Proposition 13: A Ten-Year Retrospective. Cambridge, Massachusetts: Lincoln Institute of Land Policy, 1991.

Citation: Fisher, Glenn. “History of Property Taxes in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. September 30, 2002. URL http://eh.net/encyclopedia/history-of-property-taxes-in-the-united-states/

Economic History of Portugal

Luciano Amaral, Universidade Nova de Lisboa

Main Geographical Features

Portugal is the south-westernmost country of Europe. With the approximate shape of a vertical rectangle, it has a maximum height of 561 km and a maximum length of 218 km, and is delimited (in its north-south range) by the parallels 37° and 42° N, and (in its east-west range) by the meridians 6° and 9.5° W. To the west, it faces the Atlantic Ocean, separating it from the American continent by a few thousand kilometers. To the south, it still faces the Atlantic, but the distance to Africa is only of a few hundred kilometers. To the north and the east, it shares land frontiers with Spain, and both countries constitute the Iberian Peninsula, a landmass separated directly from France and, then, from the rest of the continent by the Pyrenees. Two Atlantic archipelagos are still part of Portugal, the Azores – constituted by eight islands in the same latitudinal range of mainland Portugal, but much further west, with a longitude between 25° and 31° W – and Madeira – two islands, to the southwest of the mainland, 16° and 17° W, 32.5° and 33° N.

Climate in mainland Portugal is of the temperate sort. Due to its southern position and proximity to the Mediterranean Sea, the country’s weather still presents some Mediterranean features. Temperature is, on average, higher than in the rest of the continent. Thanks to its elongated form, Portugal displays a significant variety of landscapes and sometimes brisk climatic changes for a country of such relatively small size. Following a classical division of the territory, it is possible to identify three main geographical regions: a southern half – with practically no mountains and a very hot and dry climate – and a northern half subdivided into two other vertical sub-halves – with a north-interior region, mountainous, cool but relatively dry, and a north-coast region, relatively mountainous, cool and wet. Portugal’s population is close to 10,000,000, in an area of about 92,000 square kilometers (35,500 square miles).

The Period before the Creation of Portugal

We can only talk of Portugal as a more or less clearly identified and separate political unit (although still far from a defined nation) from the eleventh or twelfth centuries onwards. The geographical area which constitutes modern Portugal was not, of course, an eventless void before that period. But scarcity of space allows only a brief examination of the earlier period, concentrating on its main legacy to future history.

Roman and Visigothic Roots

That legacy is overwhelmingly marked by the influence of the Roman Empire. Portugal owes to Rome its language (a descendant of Latin) and main religion (Catholicism), as well as its primary juridical and administrative traditions. Interestingly enough, little of the Roman heritage passed directly to the period of existence of Portugal as a proper nation. Momentous events filtered the transition. Romans first arrived in the Iberian Peninsula around the third century B.C., and kept their rule until the fifth century of the Christian era. Then, they succumbed to the so-called “barbarian invasions.” Of the various peoples that then roamed the Peninsula, certainly the most influential were the Visigoths, a people of Germanic origin. The Visigoths may be ranked as the second most important force in the shaping of future Portugal. The country owes them the monarchical institution (which lasted until the twentieth century), as well as the preservation both of Catholicism and (although substantially transformed) parts of Roman law.

Muslim Rule

The most spectacular episode following Visigoth rule was the Muslim invasion of the eighth century. Islam ruled the Peninsula from then until the fifteenth century, although occupying an increasingly smaller area from the ninth century onwards, as the Christian Reconquista started repelling it with growing efficiency. Muslim rule set the area on a path different from the rest of Western Europe for a few centuries. However, apart from some ethnic traits legated to its people, a few words in its lexicon, as well as certain agricultural, manufacturing and sailing techniques and knowledge (of which the latter had significant importance to the Portuguese naval discoveries), nothing of the magnitude of the Roman heritage was left in the peninsula by Islam. This is particularly true of Portugal, where Muslim rule was less effective and shorter than in the South of Spain. Perhaps the most important legacy of Muslim rule was, precisely, its tolerance towards the Roman heritage. Much representative of that tolerance was the existence during the Muslim period of an ethnic group, the so-called moçárabe or mozarabe population, constituted by traditional residents that lived within Muslim communities, accepted Muslim rule, and mixed with Muslim peoples, but still kept their language and religion, i.e. some form of Latin and the Christian creed.

Modern Portugal is a direct result of the Reconquista, the Christian fight against Muslim rule in the Iberian Peninsula. That successful fight was followed by the period when Portugal as a nation came to existence. The process of creation of Portugal was marked by the specific Roman-Germanic institutional synthesis that constituted the framework of most of the country’s history.

Portugal from the Late Eleventh Century to the Late Fourteenth Century

Following the Muslim invasion, a small group of Christians kept their independence, settling in a northern area of the Iberian Peninsula called Asturias. Their resistance to Muslim rule rapidly transformed into an offensive military venture. During the eighth century a significant part of northern Iberia was recovered to Christianity. This frontier, roughly cutting the peninsula in two halves, held firm until the eleventh century. Then, the crusaders came, mostly from France and Germany, inserting the area in the overall European crusade movement. By the eleventh century, the original Asturian unit had been divided into two kingdoms, Leon and Navarra, which in turn were subdivided into three new political units, Castile, Aragon and the Condado Portucalense. The Condado Portucalense (the political unit at the origin of future Portugal) resulted from a donation, made in 1096, by the Leonese king to a Crusader coming from Burgundy (France), Count Henry. He did not claim the title king, a job that would be fulfilled only by his son, Afonso Henriques (generally accepted as the first king of Portugal) in the first decade of the twelfth century.

Condado Portucalense as the King’s “Private Property”

Such political units as the various peninsular kingdoms of that time must be seen as entities differing in many respects from current nations. Not only did their peoples not possess any clear “national consciousness,” but also the kings themselves did not rule them based on the same sort of principle we tend to attribute to current rulers (either democratic, autocratic or any other sort). Both the Condado Portucalense and Portugal were understood by their rulers as something still close to “private property” – the use of quotes here is justified by the fact that private property, in the sense we give to it today, was a non-existent notion then. We must, nevertheless, stress this as the moment in which Portuguese rulers started seeing Portugal as a political unit separate from the remaining units in the area.

Portugal as a Military Venture

Such novelty was strengthened by the continuing war against Islam, still occupying most of the center and south of what later became Portugal. This is a crucial fact about Portugal in its infancy, and one that helps one understand the most important episode in Portuguese history , the naval discoveries, i.e. that the country in those days was largely a military venture against Islam. As, in that fight, the kingdom expanded to the south, it did so separately from the other Christian kingdoms existing in the peninsula. And these ended up constituting the two main negative forces for Portugal’s definition as an independent country, i.e. Islam and the remaining Iberian Christian kingdoms. The country achieved a clear geographical definition quite early in its history, more precisely in 1249, when King Sancho II conquered the Algarve from Islam. Remarkably for a continent marked by so much permanent frontier redesign, Portugal acquired then its current geographical shape.

The military nature of the country’s growth gave rise to two of its most important characteristics in early times: Portugal was throughout this entire period a frontier country, and one where the central authority was unable to fully control the territory in its entirety. This latter fact, together with the reception of the Germanic feudal tradition, shaped the nature of the institutions then established in the country. This was particularly important in understanding the land donations made by the crown. These were crucial, for they brought a dispersion of central powers, devolved to local entities, as well as a delegation of powers we would today call “public” to entities we would call “private.” Donations were made in favor of three sorts of groups: noble families, religious institutions and the people in general of particular areas or cities. They resulted mainly from the needs of the process of conquest: noblemen were soldiers, and the crown’s concession of the control of a certain territory was both a reward for their military feats as well as an expedient way of keeping the territory under control (even if in a more indirect way) in a period when it was virtually impossible to directly control the full extent of the conquered area. Religious institutions were crucial in the Reconquista, since the purpose of the whole military effort was to eradicate the Muslim religion from the country. Additionally, priests and monks were full military participants in the process, not limiting their activity to studying or preaching. So, as the Reconquista proceeded, three sorts of territories came into existence: those under direct control of the crown, those under the control of local seigneurs (which subdivided into civil and ecclesiastical) and the communities.

Economic Impact of the Military Institutional Framework

This was an institutional framework that had a direct economic impact. The crown’s donations were not comparable to anything we would nowadays call private property. The land’s donation had attached to it the ability conferred on the beneficiary to a) exact tribute from the population living in it, b) impose personal services or reduce peasants to serfdom, and c) administer justice. This is a phenomenon that is typical of Europe until at least the eighteenth century, and is quite representative of the overlap between the private and public spheres then prevalent. The crown felt it was entitled to give away powers we would nowadays call public, such as those of taxation and administering justice, and beneficiaries from the crown’s donations felt they were entitled to them. As a further limit to full private rights, the land was donated under certain conditions, restricting the beneficiaries’ power to divide, sell or buy it. They managed those lands, thus, in a manner entirely dissimilar from a modern enterprise. And the same goes for actual farmers, those directly toiling the land, since they were sometimes serfs, and even when they were not, had to give personal services to seigneurs and pay arbitrary tributes.

Unusually Tight Connections between the Crown and High Nobility

Much of the history of Portugal until the nineteenth century revolves around the tension between these three layers of power – the crown, the seigneurs and the communities. The main trend in that relationship was, however, in the direction of an increased weight of central power over the others. This is already visible in the first centuries of existence of the country. In a process that may look paradoxical, that increased weight was accompanied by an equivalent increase in seigneurial power at the expense of the communities. This gave rise to a uniquely Portuguese institution, which would be of extreme importance for the development of the Portuguese economy (as we will later see): the extremely tight connection between the crown and the high nobility. As a matter of fact, very early in the country’s history, the Portuguese nobility and Church became much dependent on the redistributive powers of the crown, in particular in what concerns land and the tributes associated with it. This led to an apparently contradictory process, in which at the same time as the crown was gaining ascendancy in the ruling of the country, it also gave away to seigneurs some of those powers usually considered as being public in nature. Such was the connection between the crown and the seigneurs that the intersection between private and public powers proved to be very resistant in Portugal. That intersection lasted longer in Portugal than in other parts of Europe, and consequently delayed the introduction in the country of the modern notion of property rights. But this is something to be developed later, and to fully understand it we must go through some further episodes of Portuguese history. For now, we must note the novelty brought by these institutions. Although they can be seen as unfriendly to property rights from a nineteenth- and twentieth-century vantage point, they represented in fact a first, although primitive and incomplete, definition of property rights of a certain sort.

Centralization and the Evolution of Property

As the crown’s centralization of power proceeded in the early history of the country, some institutions such as serfdom and settling colonies gave way to contracts that granted fuller personal and property rights to farmers. Serfdom was not exceptionally widespread in early Portugal – and tended to disappear from the thirteenth century onwards. More common was the settlement of colonies, a situation in which settlers were simple toilers of land, having to pay significant tributes to either the king or seigneurs, but had no rights over buying and selling the land. From the thirteenth century onwards, as the king and the seigneurs began encroaching on the kingdom’s land and the military situation got calmer, serfdom and settling contracts were increasingly substituted by contracts of the copyhold type. When compared with current concepts of private property, copyhold includes serious restrictions to the full use of private property. Yet, it represented an improvement when compared to the prior legal forms of land use. In the end, private property as we understand it today began its dissemination through the country at this time, although in a form we would still consider primitive. This, to a large extent, repeats with one to two centuries of delay, the evolution that had already occurred in the core of “feudal Europe,” i.e. the Franco-Germanic world and its extension to the British Isles.

Movement toward an Exchange Economy

Precisely as in that core “feudal Europe,” such institutional change brought a first moment of economic growth to the country – of course, there are no consistent figures for economic activity in this period, and, consequently, this is entirely based on more or less superficial evidence pointing in that direction. The institutional change just noted was accompanied by a change in the way noblemen and the Church understood their possessions. As the national territory became increasingly sheltered from the destruction of war, seigneurs became less interested in military activity and conquest, and more so in the good management of the land they already owned land. Accompanying that, some vague principles of specialization also appeared. Some of those possessions were thus significantly transformed into agricultural firms devoted to a certain extent to selling on the market. One should not, of course, exaggerate the importance acquired by the exchange of goods in this period. Most of the economy continued to be of a non-exchange or (at best) barter character. But the signs of change were important, as a certain part of the economy (small as it was) led the way to future more widespread changes. Not by chance, this is the period when we have evidence of the first signs of monetization of the economy, certainly a momentous change (even if initially small in scale), corresponding to an entirely new framework for economic relations.

These essential changes are connected with other aspects of the country’s evolution in this period. First, the war at the frontier (rather than within the territory) seems to have had a positive influence on the rest of the economy. The military front was constituted by a large number of soldiers, who needed constant supply of various goods, and this geared a significant part of the economy. Also, as the conquest enlarged the territory under the Portuguese crown’s control, the king’s court became ever more complex, thus creating one more demand pole. Additionally, together with enlargement of territory also came the insertion within the economy of various cities previously under Muslim control (such as the future capital, Lisbon, after 1147). All this was accompanied by a widespread movement of what we might call internal colonization, whose main purpose was to farm previously uncultivated agricultural land. This is also the time of the first signs of contact of Portuguese merchants with foreign markets, and foreign merchants with Portuguese markets. There are various signs of the presence of Portuguese merchants in British, French and Flemish ports, and vice versa. Much of Portuguese exports were of a typical Mediterranean nature, such as wine, olive oil, salt, fish and fruits, and imports were mainly of grain and textiles. The economy became, thus, more complex, and it is only natural that, to accompany such changes, the notions of property, management and “firm” changed in such a way as to accommodate the new evolution. The suggestion has been made that the success of the Christian Reconquista depended to a significant extent on the economic success of those innovations.

Role of the Crown in Economic Reforms

Of additional importance for the increasing sophistication of the economy is the role played by the crown as an institution. From the thirteenth century onwards, the rulers of the country showed a growing interest in having a well organized economy able to grant them an abundant tax base. Kings such as Afonso III (ruling from 1248 until 1279) and D. Dinis (1279-1325) became famous for their economic reforms. Monetary reforms, fiscal reforms, the promotion of foreign trade, and the promotion of local fairs and markets (an extraordinarily important institution for exchange in medieval times) all point in the direction of an increased awareness on the part of Portuguese kings of the relevance of promoting a proper environment for economic activity. Again, we should not exaggerate the importance of that awareness. Portuguese kings were still significantly (although not entirely) arbitrary rulers, able with one decision to destroy years of economic hard work. But changes were occurring, and some in a direction positive for economic improvement.

As mentioned above, the definition of Portugal as a separate political entity had two main negative elements: Islam as occupier of the Iberian Peninsula and the centralization efforts of the other political entities in the same area. The first element faded as the Portuguese Reconquista, by mid-thirteenth century, reached the southernmost point in the territory of what is today’s Portugal. The conflict (either latent or open) with the remaining kingdoms of the peninsula was kept alive much beyond that. As the early centuries of the first millennium unfolded, a major centripetal force emerged in the peninsula, the kingdom of Castile. Castile progressively became the most successful centralizing political unit in the area. Such success reached a first climatic moment by the middle of the fifteenth century, during the reign of Ferdinand and Isabella, and a second one by the end of the sixteenth century, with the brief annexation of Portugal by the Spanish king, Phillip II. Much of the effort of Portuguese kings was to keep Portugal independent of those other kingdoms, particularly Castile. But sometimes they envisaged something different, such as an Iberian union with Portugal as its true political head. It was one of those episodes that led to a major moment both for the centralization of power in the Portuguese crown within the Portuguese territory and for the successful separation of Portugal from Castile.

Ascent of John I (1385)

It started during the reign of King Ferdinand (of Portugal), during the sixth and seventh decades of the fourteenth century. Through various maneuvers to unite Portugal to Castile (which included war and the promotion of diverse coups), Ferdinand ended up marrying his daughter to the man who would later become king of Castile. Ferdinand was, however, generally unsuccessful in his attempts to tie the crowns under his heading, and when he died in 1383 the king of Castile (thanks to his marriage with Ferdinand’s daughter) became the legitimate heir to the Portuguese crown. This was Ferdinand’s dream in reverse. The crowns would unite, but not under Portugal. The prospect of peninsular unity under Castile was not necessarily loathed by a large part of Portuguese elites, particularly parts of the aristocracy, which viewed Castile as a much more noble-friendly kingdom. This was not, however, a unanimous sentiment, and a strong reaction followed, led by other parts of the same elite, in order to keep the Portuguese crown in the hands of a Portuguese king, separate from Castile. A war with Castile and intimations of civil war ensued, and in the end Portugal’s independence was kept. The man chosen to be the successor of Ferdinand, under a new dynasty, was the bastard son of Peter I (Ferdinand’s father), the man who became John I in 1385.

This was a crucial episode, not simply because of the change in dynasty, imposed against the legitimate heir to the throne, but also because of success in the centralization of power by the Portuguese crown and, as a consequence, of separation of Portugal from Castile. Such separation led Portugal, additionally, to lose interest in further political adventures concerning Castile, and switch its attention to the Atlantic. It was the exploration of this path that led to the most unique period in Portuguese history, one during which Portugal reached heights of importance in the world that find no match in either its past or future history. This period is the Discoveries, a process that started during John I’s reign, in particular under the forceful direction of the king’s sons, most famous among them the mythical Henry, the Navigator. The 1383-85 crisis and John’s victory can thus be seen as the founding moment of the Portuguese Discoveries.

The Discoveries and the Apex of Portuguese International Power

The Discoveries are generally presented as the first great moment of world capitalism, with markets all over the world getting connected under European leadership. Albeit true, this is a largely post hoc perspective, for the Discoveries became a big commercial adventure only somewhere half-way into the story. Before they became such a thing, the aims of the Discoveries’ protagonists were mostly of another sort.

The Conquest of Ceuta

An interesting way to have a fuller picture of the Discoveries is to study the Portuguese contribution to them. Portugal was the pioneer of transoceanic navigation, discovering lands and sea routes formerly unknown to Europeans, and starting trades and commercial routes that linked Europe to other continents in a totally unprecedented fashion. But, at the start, the aims of the whole venture were entirely other. The event generally chosen to date the beginning of the Portuguese discoveries is the conquest of Ceuta – a city-state across the Straits of Gibraltar from Spain – in 1415. In itself such voyage would not differ much from other attempts made in the Mediterranean Sea from the twelfth century onwards by various European travelers. The main purpose of all these attempts was to control navigation in the Mediterranean, in what constitutes a classical fight between Christianity and Islam. Other objectives of Portuguese travelers were the will to find the mythical Prester John – a supposed Christian king surrounded by Islam: there are reasons to suppose that the legend of Prester John is associated with the real existence of the Copt Christians of Ethiopia – and to reach, directly at the source, the gold of Sudan. Despite this latter objective, religious reasons prevailed over others in spurring the first Portuguese efforts of overseas expansion. This should not surprise us, however, for Portugal had since its birth been, precisely, an expansionist political unit under a religious heading. The jump to the other side of the sea, to North Africa, was little else than the continuation of that expansionist drive. Here we must understand Portugal’s position as determined by two elements, one that was general to the whole European continent, and another one, more specific. The first is that the expansion of Portugal in the Middle-Ages coincides with the general expansion of Europe. And Portugal was very much a part of that process. The second is that, by being part of the process, Portugal was (by geographical hazard) at the forefront of the process. Portugal (and Spain) was in the first line of attack and defense against Islam. The conquest of Ceuta, by Henry, the Navigator, is hence a part of that story of confrontation with Islam.

Exploration from West Africa to India

The first efforts of Henry along the Western African coast and in the Atlantic high sea can be put within this same framework. The explorations along the African coast had two main objectives: to have a keener perception of how far south Islam’s strength went, and to surround Morocco, both in order to attack Islam on a wider shore and to find alternative ways to reach Prester John. These objectives depended, of course, on geographical ignorance, as the line of coast Portuguese navigators eventually found was much larger than the one Henry expected to find. In these efforts, Portuguese navigators went increasingly south, but also, mainly due to accidental changes of direction, west. Such westbound dislocations led to the discovery, in the first decades of the fifteenth century, of three archipelagos, the Canaries, Madeira (and Porto Santo) and the Azores. But the major navigational feat of this period was the passage of Cape Bojador in 1434, in the sequence of which the whole western coast of the African continent was opened for exploration and increasingly (and here is the novelty) commerce. As Africa revealed its riches, mostly gold and slaves, these ventures began acquiring a more strict economic meaning. And all this kept on fostering the Portuguese to go further south, and when they reached the southernmost tip of the African continent, to pass it and go east. And so they did. Bartolomeu Dias crossed the Cape of Good Hope in 1487 and ten years later Vasco da Gama would entirely circumnavigate Africa to reach India by sea. By the time of Vasco da Gama’s journey, the autonomous economic importance of intercontinental trade was well established.

Feitorias and Trade with West Africa, the Atlantic Islands and India

As the second half of the fifteenth century unfolded, Portugal created a complex trade structure connecting India and the African coast to Portugal and, then, to the north of Europe. This consisted of a net of trading posts (feitorias) along the African coast, where goods were shipped to Portugal, and then re-exported to Flanders, where a further Portuguese feitoria was opened. This trade was based on such African goods as gold, ivory, red peppers, slaves and other less important goods. As was noted by various authors, this was somehow a continuation of the pattern of trade created during the Middle Ages, meaning that Portugal was able to diversify it, by adding new goods to its traditional exports (wine, olive oil, fruits and salt). The Portuguese established a virtual monopoly of these African commercial routes until the early sixteenth century. The only threats to that trade structure came from pirates originating in Britain, Holland, France and Spain. One further element of this trade structure was the Atlantic Islands (Madeira, the Azores and the African archipelagos of Cape Verde and São Tomé). These islands contributed with such goods as wine, wheat and sugar cane. After the sea route to India was discovered and the Portuguese were able to establish regular connections with India, the trading structure of the Portuguese empire became more complex. Now the Portuguese began bringing multiple spices, precious stones, silk and woods from India, again based on a net of feitorias there established. The maritime route to India acquired an extreme importance to Europe, precisely at this time, since the Ottoman Empire was then able to block the traditional inland-Mediterranean route that supplied the continent with Indian goods.

Control of Trade by the Crown

One crucial aspect of the Portuguese Discoveries is the high degree of control exerted by the crown over the whole venture. The first episodes in the early fifteenth century, under Henry the Navigator (as well as the first exploratory trips along the African coast) were entirely directed by the crown. Then, as the activity became more profitable, it was, first, liberalized, and then rented (in totu) to merchants, whom were constrained to pay the crown a significant share of their profits. Finally, when the full Indo-African network was consolidated, the crown controlled directly the largest share of the trade (although never monopolizing it), participated in “public-private” joint-ventures, or imposed heavy tributes on traders. The grip of the crown increased with growth of the size and complexity of the empire. Until the early sixteenth century, the empire consisted mainly of a network of trading posts. No serious attempt was made by the Portuguese crown to exert a significant degree of territorial control over the various areas constituting the empire.

The Rise of a Territorial Empire

This changed with the growth of trade from India and Brazil. As India was transformed into a platform for trade not only around Africa but also in Asia, a tendency was developed (in particular under Afonso de Albuquerque, in the early sixteenth century) to create an administrative structure in the territory. This was not particularly successful. An administrative structure was indeed created, but stayed forever incipient. A relatively more complex administrative structure would only appear in Brazil. Until the middle of the sixteenth century, Brazil was relatively ignored by the crown. But with the success of the system of sugar cane plantation in the Atlantic Isles, the Portuguese crown decided to transplant it to Brazil. Although political power was controlled initially by a group of seigneurs to whom the crown donated certain areas of the territory, the system got increasingly more centralized as time went on. This is clearly visible with the creation of the post of governor-general of Brazil, directly respondent to the crown, in 1549.

Portugal Loses Its Expansionary Edge

Until the early sixteenth century, Portugal capitalized on being the pioneer of European expansion. It monopolized African and, initially, Indian trade. But, by that time, changes were taking place. Two significant events mark the change in political tide. First, the increasing assertiveness of the Ottoman Empire in the Eastern Mediterranean, which coincided with a new bout of Islamic expansionism – ultimately bringing the Mughal dynasty to India – as well as the re-opening of the Mediterranean route for Indian goods. This put pressure on Portuguese control over Indian trade. Not only was political control over the subcontinent now directly threatened by Islamic rulers, but also the profits from Indian trade started declining. This is certainly one of the reasons why Portugal redirected its imperial interests to the south Atlantic, particularly Brazil – the other reasons being the growing demand for sugar in Europe and the success of the sugar cane plantation system in the Atlantic islands. The second event marking the change in tide was the increased assertiveness of imperial Spain, both within Europe and overseas. Spain, under the Habsburgs (mostly Charles V and Phillip II), exerted a dominance over the European continent which was unprecedented since Roman times. This was complemented by the beginning of exploration of the American continent (from the Caribbean to Mexico and the Andes), again putting pressure on the Portuguese empire overseas. What is more, this is the period when not only Spain, but also Britain, Holland and France acquired navigational and commercial skills equivalent to the Portuguese, thus competing with them in some of their more traditional routes and trades. By the middle of the sixteenth century, Portugal had definitely lost the expansionary edge. And this would come to a tragic conclusion in 1580, with the death of the heirless King Sebastian in North Africa and the loss of political independence to Spain, under Phillip II.

Empire and the Role, Power and Finances of the Crown

The first century of empire brought significant political consequences for the country. As noted above, the Discoveries were directed by the crown to a very large extent. As such, they constituted one further step in the affirmation of Portugal as a separate political entity in the Iberian Peninsula. Empire created a political and economic sphere where Portugal could remain independent from the rest of the peninsula. It thus contributed to the definition of what we might call “national identity.” Additionally, empire enhanced significantly the crown’s redistributive power. To benefit from profits from transoceanic trade, to reach a position in the imperial hierarchy or even within the national hierarchy proper, candidates had to turn to the crown. As it controlled imperial activities, the crown became a huge employment agency, capable of attracting the efforts of most of the national elite. The empire was, thus, transformed into an extremely important instrument of the crown in order to centralize power. It has already been mentioned that much of the political history of Portugal from the Middle Ages to the nineteenth century revolves around the tension between the centripetal power of the crown and the centrifugal powers of the aristocracy, the Church and the local communities. Precisely, the imperial episode constituted a major step in the centralization of the crown’s power. The way such centralization occurred was, however, peculiar, and that would bring crucial consequences for the future. Various authors have noted how, despite the growing centralizing power of the crown, the aristocracy was able to keep its local powers, thanks to the significant taxing and judicial autonomy it possessed in the lands under its control. This is largely true, but as other authors have noted, this was done with the crown acting as an intermediary agent. The Portuguese aristocracy was since early times much less independent from the crown than in most parts of Western Europe, and this situation accentuated during the days of empire. As we have seen above, the crown directed the Reconquista in a way that made it able to control and redistribute (through the famous donations) most of the land that was conquered. In those early medieval days, it was, thus, the service to the crown that made noblemen eligible to benefit from land donations. It is undoubtedly true that by donating land the crown was also giving away (at least partially) the monopoly of taxing and judging. But what is crucial here is its significant intermediary power. With empire, that power increased again. And once more a large part of the aristocracy became dependent on the crown to acquire political and economic power. The empire became, furthermore, the main means of financing of the crown. Receipts from trade activities related to the empire (either profits, tariffs or other taxes) never went below 40 percent of total receipts of the crown, until the nineteenth century, and this was only briefly in its worst days. Most of the time, those receipts amounted to 60 or 70 percent of total crown’s receipts.

Other Economic Consequences of the Empire

Such a role for the crown’s receipts was one of the most important consequences of empire. Thanks to it, tax receipts from internal economic activity became in large part unnecessary for the functioning of national government, something that was going to have deep consequences, precisely for that exact internal activity. This was not, however, the only economic consequence of empire. One of the most important was, obviously, the enlargement of the trade base of the country. Thanks to empire, the Portuguese (and Europe, through the Portuguese) gained access to vast sources of precious metals, stones, tropical goods (such as fruit, sugar, tobacco, rice, potatoes, maize, and more), raw materials and slaves. Portugal used these goods to enlarge its comparative advantage pattern, which helped it penetrate European markets, while at the same time enlarging the volume and variety of imports from Europe. Such a process of specialization along comparative advantage principles was, however, very incomplete. As noted above, the crown exerted a high degree of control over the trade activity of empire, and as a consequence, many institutional factors interfered in order to prevent Portugal (and its imperial complex) from fully following those principles. In the end, in economic terms, the empire was inefficient – something to be contrasted, for instance, with the Dutch equivalent, much more geared to commercial success, and based on clearer efficiency managing-methods. By so significantly controlling imperial trade, the crown became a sort of barrier between the empire’s riches and the national economy. Much of what was earned in imperial activity was spent either on maintaining it or on the crown’s clientele. Consequently, the spreading of the gains from imperial trade to the rest of the economy was highly centralized in the crown. A much visible effect of this phenomenon was the fantastic growth and size of the country’s capital, Lisbon. In the sixteenth century, Lisbon was the fifth largest city in Europe, and from the sixteenth century to the nineteenth century it was always in the top ten, a remarkable feat for a country with such a small population as Portugal. And it was also the symptom of a much inflated bureaucracy, living on the gains of empire, as well as of the low degree of repercussion of those gains of empire through the whole of the economy.

Portuguese Industry and Agriculture

The rest of the economy did, indeed, remain very much untouched by this imperial manna. Most of industry was untouched by it, and the only visible impact of empire on the sector was by fostering naval construction and repair, and all the accessory activities. Most of industry kept on functioning according to old standards, far from the impact of transoceanic prosperity. And much the same happened with agriculture. Although benefiting from the introduction of new crops (mostly maize, but also potatoes and rice), Portuguese agriculture did not benefit significantly from the income stream arising from imperial trade, in particular when we could expect it to be a source of investment. Maize constituted an important technological innovation which had a much important impact on the Portuguese agriculture’s productivity, but it was too localized in the north-western part of the country, thus leaving the rest of the sector untouched.

Failure of a Modern Land Market to Develop

One very important consequence of empire on agriculture and, hence, on the economy, was the preservation of the property structure coming from the Middle Ages, namely that resulting from the crown’s donations. The empire enhanced again the crown’s powers to attract talent and, consequently, donate land. Donations were regulated by official documents called Cartas de Foral, in which the tributes due to the beneficiaries were specified. During the time of the empire, the conditions ruling donations changed in a way that reveals an increased monarchical power: donations were made for long periods (for instance, one life), but the land could not be sold nor divided (and, thus, no parts of it could be sold separately) and renewal required confirmation on the part of the crown. The rules of donation, thus, by prohibiting buying, selling and partition of land, were a major obstacle to the existence not only of a land market, but also of a clear definition of property rights, as well as freedom in the management of land use.

Additionally, various tributes were due to the beneficiaries. Some were in kind, some in money, some were fixed, others proportional to the product of the land. This process dissociated land ownership and appropriation of land product, since the land was ultimately the crown’s. Furthermore, the actual beneficiaries (thanks to the donation’s rules) had little freedom in the management of the donated land. Although selling land in such circumstances was forbidden to the beneficiaries, renting it was not, and several beneficiaries did so. A new dissociation between ownership and appropriation of product was thus introduced. Although in these donations some tributes were paid by freeholders, most of them were paid by copyholders. Copyhold granted to its signatories the use of land in perpetuity or in lives (one to three), but did not allow them to sell it. This introduced a new dissociation between ownership, appropriation of land product and its management. Although it could not be sold, land under copyhold could be ceded in “sub-copyhold” contracts – a replication of the original contract under identical conditions. This introduced, obviously, a new complication to the system. As should be clear by now, such a “baroque” system created an accumulation of layers of rights over the land, as different people could exert different rights over it, and each layer of rights was limited by the other layers, and sometimes conflicting with them in an intricate way. A major consequence of all this was the limited freedom the various owners of rights had in the management of their assets.

High Levels of Taxation in Agriculture

A second direct consequence of the system was the complicated juxtaposition of tributes on agricultural product. The land and its product in Portugal in those days were loaded with tributes (a sort of taxation). This explains one recent historian’s claim (admittedly exaggerated) that, in that period, those who owned the land did not toil it, and those who toiled it did not hold it. We must distinguish these tributes from strict rent payments, as rent contracts are freely signed by the two (or more) sides taking part in it. The tributes we are discussing here represented, in reality, an imposition, which makes the use of the word taxation appropriate to describe them. This is one further result of the already mentioned feature of the institutional framework of the time, the difficulty to distinguish between the private and the public spheres.

Besides the tributes we have just described, other tributes also impended on the land. Some were, again, of a nature we would call private nowadays, others of a more clearly defined public nature. The former were the tributes due to the Church, the latter the taxes proper, due explicitly as such to the crown. The main tribute due to the Church was the tithe. In theory, the tithe was a tenth of the production of farmers and should be directly paid to certain religious institutions. In practice, not always was it a tenth of the production nor did the Church always receive it directly, as its collection was in a large number of cases rented to various other agents. Nevertheless, it was an important tribute to be paid by producers in general. The taxes due to the crown were the sisa (an indirect tax on consumption) and the décima (an income tax). As far as we know, these tributes weighted on average much less than the seigneurial tributes. Still, when added to them, they accentuated the high level of taxation or para-taxation typical of the Portuguese economy of the time.

Portugal under Spanish Rule, Restoration of Independence and the Eighteenth Century

Spanish Rule of Portugal, 1580-1640

The death of King Sebastian in North Africa, during a military mission in 1578, left the Portuguese throne with no direct heir. There were, however, various indirect candidates in line, thanks to the many kinship links established by the Portuguese royal family to other European royal and aristocratic families. Among them was Phillip II of Spain. He would eventually inherit the Portuguese throne, although only after invading the country in 1580. Between 1578 and 1580 leaders in Portugal tried unsuccessfully to find a “national” solution to the succession problem. In the end, resistance to the establishment of Spanish rule was extremely light.

Initial Lack of Resistance to Spanish Rule

To understand why resistance was so mild one must bear in mind the nature of such political units as the Portuguese and Spanish kingdoms at the time. These kingdoms were not the equivalent of contemporary nation-states. They had a separate identity, evident in such things as a different language, a different cultural history, and different institutions, but this didn’t amount to being a nation. The crown itself, when seen as an institution, still retained many features of a “private” venture. Of course, to some extent it represented the materialization of the kingdom and its “people,” but (by the standards of current political concepts) it still retained a much more ambiguous definition. Furthermore, Phillip II promised to adopt a set of rules allowing for extensive autonomy: the Portuguese crown would be “aggregated” to the Spanish crown although not “absorbed” or “associated” or even “integrated” with it. According to those rules, Portugal was to keep its separate identity as a crown and as a kingdom. All positions in the Portuguese government were to be attributed to Portuguese persons, the Portuguese language was the only one allowed in official matters in Portugal, positions in the Portuguese empire were to be attributed only to Portuguese.

The implementation of such rules depended largely on the willingness of the Portuguese nobility, Church and high-ranking officials to accept them. As there were no major popular revolts that could pressure these groups to decide otherwise, they did not have much difficulty in accepting them. In reality, they saw the new situation as an opportunity for greater power. After all, Spain was then the largest and most powerful political unit in Europe, with vast extensions throughout the world. To participate in such a venture under conditions of great autonomy was seen as an excellent opening.

Resistance to Spanish Rule under Phillip IV

The autonomous status was kept largely untouched until the third decade of the seventeenth century, i.e., until Phillip IV’s reign (1621-1640, in Portugal). This was a reign marked by an important attempt at centralization of power under the Spanish crown. A major impulse for this was Spain’s participation in the Thirty Years War. Simply put, the financial stress caused by the war forced the crown not only to increase fiscal pressure on the various political units under it but also to try to control them more closely. This led to serious efforts at revoking the autonomous status of Portugal (as well as other European regions of the empire). And it was as a reaction to those attempts that many Portuguese aristocrats and important personalities led a movement to recover independence. This movement must, again, be interpreted with care, paying attention to the political concepts of the time. This was not an overtly national reaction, in today’s sense of the word “national.” It was mostly a reaction from certain social groups that felt a threat to their power by the new plans of increased centralization under Spain. As some historians have noted, the 1640 revolt should be best understood as a movement to preserve the constitutional elements of the framework of autonomy established in 1580, against the new centralizing drive, rather than a national or nationalist movement.

Although that was the original intent of the movement, the fact is that, progressively, the new Portuguese dynasty (whose first monarch was John IV, 1640-1656) proceeded to an unprecedented centralization of power in the hands of the Portuguese crown. This means that, even if the original intent of the mentors of the 1640 revolt was to keep the autonomy prevalent both under pre-1580 Portuguese rule and post-1580 Spanish rule, the final result of their action was to favor centralization in the Portuguese crown, and thus help define Portugal as a clearly separate country. Again, we should be careful not to interpret this new bout of centralization in the seventeenth and eighteenth centuries as the creation of a national state and of a modern government. Many of the intermediate groups (in particular the Church and the aristocracy) kept their powers largely intact, even powers we would nowadays call public (such as taxation, justice and police). But there is no doubt that the crown increased significantly its redistributive power, and the nobility and the church had, increasingly, to rely on service to the crown to keep most of their powers.

Consequences of Spanish Rule for the Portuguese Empire

The period of Spanish rule had significant consequences for the Portuguese empire. Due to integration in the Spanish empire, Portuguese colonial territories became a legitimate target for all of Spain’s enemies. The European countries having imperial strategies (in particular, Britain, the Netherlands and France) no longer saw Portugal as a countervailing ally in their struggle with Spain, and consequently promoted serious assaults on Portuguese overseas possessions. There was one further element of the geopolitical landscape of the period that aggravated the willingness of competitors to attack Portugal, and that was Holland’s process of separation from the Spanish empire. Spain was not only a large overseas empire but also an enormous European one, of which Holland was a part until the 1560s. Holland, precisely, saw the Portuguese section of the Iberian empire as its weakest link, and, accordingly, attacked it in a fairly systematic way. The Dutch attack on Portuguese colonial possessions ranged from America (Brazil) to Africa (Sao Tome and Angola) to Asia (India, several points in Southeast Asia, and Indonesia), and in the course of it several Portuguese territories were conquered, mostly in Asia. Portugal, however, managed to keep most of its African and American territories.

The Shift of the Portuguese Empire toward the Atlantic

When it regained independence, Portugal had to re-align its external position in accordance with the new context. Interestingly enough, all those rivals that had attacked the country’s possessions during Spanish rule initially supported its separation. France was the most decisive partner in the first efforts to regain independence. Later (in the 1660s, in the final years of the war with Spain) Britain assumed that role. This was to inaugurate an essential feature of Portuguese external relations. From then on Britain became the most consistent Portuguese foreign partner. In the 1660s such a move was connected to the re-orientation of the Portuguese empire. What had until then been the center of empire (its Eastern part – India and the rest of Asia) lost importance. At first, this was due to the renewal in activity in the Mediterranean route, something that threatened the sea route to India. Then, this was because the Eastern empire was the part where the Portuguese had ceded more territory during Spanish rule, in particular to the Netherlands. Portugal kept most of its positions both in Africa and America, and this part of the world was to acquire extreme importance in the seventeenth and eighteenth centuries. In the last decades of the seventeenth century, Portugal was able to develop numerous trades mostly centered in Brazil (although some of the Atlantic islands also participated), involving sugar, tobacco and tropical woods, all sent to the growing market for luxury goods in Europe, to which was added a growing and prosperous trade of slaves from West Africa to Brazil.

Debates over the Role of Brazilian Gold and the Methuen Treaty

The range of goods in Atlantic trade acquired an important addition with the discovery of gold in Brazil in the late seventeenth century. It is the increased importance of gold in Portuguese trade relations that helps explain one of the most important diplomatic moments in Portuguese history, the Methuen Treaty (also called the Queen Anne Treaty), signed between Britain and Portugal in 1703. Many Portuguese economists and historians have blamed the treaty for Portugal’s inability to achieve modern economic growth during the eighteenth and nineteenth centuries. It must be remembered that the treaty stipulated tariffs to be reduced in Britain for imports of Portuguese wine (favoring it explicitly in relation to French wine), while, as a counterpart, Portugal had to eliminate all prohibitions on imports of British wool textiles (even if tariffs were left in place). Some historians and economists have seen this as Portugal’s abdication of having a national industrial sector and, instead, specializing in agricultural goods for export. As proof, such scholars present figures for the balance of trade between Portugal and Britain after 1703, with the former country exporting mainly wine and the latter textiles, and a widening trade deficit. Other authors, however, have shown that what mostly allowed for this trade (and the deficit) was not wine but the newly discovered Brazilian gold. Could, then, gold be the culprit for preventing Portuguese economic growth? Most historians now reject the hypothesis. The problem would lie not in a particular treaty signed in the early eighteenth century but in the existing structural conditions for the economy to grow – a question to be dealt with further below.

Portuguese historiography currently tends to see the Methuen Treaty mostly in the light of Portuguese diplomatic relations in the seventeenth and eighteenth centuries. The treaty would mostly mark the definite alignment of Portugal within the British sphere. The treaty was signed during the War of Spanish Succession. This was a war that divided Europe in a most dramatic manner. As the Spanish crown was left without a successor in 1700, the countries of Europe were led to support different candidates. The diplomatic choice ended up being polarized around Britain, on the one side, and France, on the other. Increasingly, Portugal was led to prefer Britain, as it was the country that granted more protection to the prosperous Portuguese Atlantic trade. As Britain also had an interest in this alignment (due to the important Portuguese colonial possessions), this explains why the treaty was economically beneficial to Portugal (contrary to what some of the older historiography tended to believe) In fact, in simple trade terms, the treaty was a good bargain for both countries, each having been given preferential treatment for certain of its more typical goods.

Brazilian Gold’s Impact on Industrialization

It is this sequence of events that has led several economists and historians to blame gold for the Portuguese inability to industrialize in the eighteenth and nineteenth centuries. Recent historiography, however, has questioned the interpretation. All these manufactures were dedicated to the production of luxury goods and, consequently, directed to a small market that had nothing to do (in both the nature of the market and technology) with those sectors typical of European industrialization. Were it to continue, it is very doubtful it would ever have become a full industrial spurt of the kind then underway in Britain. The problem lay elsewhere, as we will see below.

Prosperity in the Early 1700s Gives Way to Decline

Be that as it may, the first half of the eighteenth century was a period of unquestionable prosperity for Portugal, mostly thanks to gold, but also to the recovery of the remaining trades (both tropical and from the mainland). Such prosperity is most visible in the period of King John V (1706-1750). This is generally seen as the Portuguese equivalent to the reign of France’s Louis XIV. Palaces and monasteries of great dimensions were then built, and at the same time the king’s court acquired a pomp and grandeur not seen before or after, all financed largely by Brazilian gold. By the mid-eighteenth century, however, it all began to falter. The beginning of decline in gold remittances occurred in the sixth decade of the century. A new crisis began, which was compounded by the dramatic 1755 earthquake, which destroyed a large part of Lisbon and other cities. This new crisis was at the root of a political project aiming at a vast renaissance of the country. This was the first in a series of such projects, all of them significantly occurring in the sequence of traumatic events related to empire. The new project is associated with King Joseph I period (1750-1777), in particular with the policies of his prime-minister, the Marquis of Pombal.

Centralization under the Marquis of Pombal

The thread linking the most important political measures taken by the Marquis of Pombal is the reinforcement of state power. A major element in this connection was his confrontation with certain noble and church representatives. The most spectacular episodes in this respect were, first, the killing of an entire noble family and, second, the expulsion of the Jesuits from national soil. Sometimes this is taken as representing an outright hostile policy towards both aristocracy and church. However, it should be best seen as an attempt to integrate aristocracy and church into the state, thus undermining their autonomous powers. In reality, what the Marquis did was to use the power to confer noble titles, as well as the Inquisition, as means to centralize and increase state power. As a matter of fact, one of the most important instruments of recruitment for state functions during the Marquis’ rule was the promise of noble titles. And the Inquisition’s functions also changed form being mainly a religious court, mostly dedicated to the prosecution of Jews, to becoming a sort of civil political police. The Marquis’ centralizing policy covered a wide range of matters, in particular those most significant to state power. Internal police was reinforced, with the creation of new police institutions directly coordinated by the central government. The collection of taxes became more efficient, through an institution more similar to a modern Treasury than any earlier institutions. Improved collection also applied to tariffs and profits from colonial trade.

Centralizing power by the government had significant repercussions in certain aspects of the relationship between state and civil society. Although the Marquis’ rule is frequently pictured as violent, it included measures generally considered as “enlightened.” Such is the case of the abolition of the distinction between “New Christians” and Christians (new Christians were Jews converted to Catholicism, and as such suffered from a certain degree of segregation, constituting an intermediate category between Jews and Christians proper). Another very important political measure by the Marquis was the abolition of slavery in the empire’s mainland (even if slavery kept on being used in the colonies and the slave trade continued to prosper, there is no way of questioning the importance of the measure).

Economic Centralization under the Marquis of Pombal

The Marquis applied his centralizing drive to economic matters as well. This happened first in agriculture, with the creation of a monopolizing company for trade in Port wine. It continued in colonial trade, where the method applied was the same, that is, the creation of companies monopolizing trade for certain products or regions of the empire. Later, interventionism extended to manufacturing. Such interventionism was essentially determined by the international trade crisis that affected many colonial goods, the most important among them gold. As the country faced a new international payments crisis, the Marquis reverted to protectionism and subsidization of various industrial sectors. Again, as such state support was essentially devoted to traditional, low-tech, industries, this policy failed to boost Portugal’s entry into the group of countries that first industrialized.

Failure to Industrialize

The country would never be the same after the Marquis’ consulate. The “modernization” of state power and his various policies left a profound mark in the Portuguese polity. They were not enough, however, to create the necessary conditions for Portugal to enter a process of industrialization. In reality, most of the structural impediments to modern growth were left untouched or aggravated by the Marquis’ policies. This is particularly true of the relationship between central power and peripheral (aristocratic) powers. The Marquis continued the tradition exacerbated during the fifteenth and sixteenth centuries of liberally conferring noble titles to court members. Again, this accentuated the confusion between the public and the private spheres, with a particular incidence (for what concerns us here) in the definition of property and property rights. The act of granting a noble title by the crown, on many occasions implied a donation of land. The beneficiary of the donation was entitled to collect tributes from the population living in the territory but was forbidden to sell it and, sometimes, even rent it. This meant such beneficiaries were not true owners of the land. The land could not exactly be called their property. This lack of private rights was, however, compensated by the granting of such “public” rights as the ability to obtain tributes – a sort of tax. Beneficiaries of donations were, thus, neither true landowners nor true state representatives. And the same went for the crown. By giving away many of the powers we tend to call public today, the crown was acting as if it could dispose of land under its administration in the same manner as private property. But since this was not entirely private property, by doing so the crown was also conceding public powers to agents we would today call private. Such confusion did not help the creation of either a true entrepreneurial class or of a state dedicated to the protection of private property rights.

The whole property structure described above was kept, even after the reforming efforts of the Marquis of Pombal. The system of donations as a method of payment for jobs taken at the King’s court as well as the juxtaposition of various sorts of tributes, either to the crown or local powers, allowed for the perpetuation of a situation where the private and the public spheres were not clearly separated. Consequently, property rights were not well defined. If there is a crucial reason for Portugal’s impaired economic development, these are the things we should pay attention to. Next, we will begin the study of the nineteenth and twentieth centuries, and see how difficult was the dismantling of such an institutional structure and how it affected the growth potential of the Portuguese economy.

Suggested Reading:

Birmingham, David. A Concise History of Portugal. Cambridge: Cambridge University Press, 1993.

Boxer, C.R. The Portuguese Seaborne Empire, 1415-1825. New York: Alfred A. Knopf, 1969.

Godinho, Vitorino Magalhães. “Portugal and Her Empire, 1680-1720.” The New Cambridge Modern History, Vol. VI. Cambridge: Cambridge University Press, 1970.

Oliveira Marques, A.H. History of Portugal. New York: Columbia University Press, 1972.

Wheeler, Douglas. Historical Dictionary of Portugal. London: Scarecrow Press, 1993.

Citation: Amaral, Luciano. “Economic History of Portugal”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/economic-history-of-portugal/

An Economic History of New Zealand in the Nineteenth and Twentieth Centuries

John Singleton, Victoria University of Wellington, New Zealand

Living standards in New Zealand were among the highest in the world between the late nineteenth century and the 1960s. But New Zealand’s economic growth was very sluggish between 1950 and the early 1990s, and most Western European countries, as well as several in East Asia, overtook New Zealand in terms of real per capita income. By the early 2000s, New Zealand’s GDP per capita was in the bottom half of the developed world.

Table 1:
Per capita GDP in New Zealand
compared with the United States and Australia
(in 1990 international dollars)

US Australia New Zealand NZ as
% of US
NZ as % of
Austrialia
1840 1588 1374 400 25 29
1900 4091 4013 4298 105 107
1950 9561 7412 8456 88 114
2000 28129 21540 16010 57 74

Source: Angus Maddison, The World Economy: Historical Statistics. Paris: OECD, 2003, pp. 85-7.

Over the second half of the twentieth century, argue Greasley and Oxley (1999), New Zealand seemed in some respects to have more in common with Latin American countries than with other advanced western nations. As well as a snail-like growth rate, New Zealand followed highly protectionist economic policies between 1938 and the 1980s. (In absolute terms, however, New Zealanders continued to be much better off than their Latin American counterparts.) Maddison (1991) put New Zealand in a middle-income group of countries, including the former Czechoslovakia, Hungary, Portugal, and Spain.

Origins and Development to 1914

When Europeans (mainly Britons) started to arrive in Aotearoa (New Zealand) in the early nineteenth century, they encountered a tribal society. Maori tribes made a living from agriculture, fishing, and hunting. Internal trade was conducted on the basis of gift exchange. Maori did not hold to the Western concept of exclusive property rights in land. The idea that land could be bought and sold was alien to them. Most early European residents were not permanent settlers. They were short-term male visitors involved in extractive activities such as sealing, whaling, and forestry. They traded with Maori for food, sexual services, and other supplies.

Growing contact between Maori and the British was difficult to manage. In 1840 the British Crown and some Maori signed the Treaty of Waitangi. The treaty, though subject to various interpretations, to some extent regularized the relationship between Maori and Europeans (or Pakeha). At roughly the same time, the first wave of settlers arrived from England to set up colonies including Wellington and Christchurch. Settlers were looking for a better life than they could obtain in overcrowded and class-ridden England. They wished to build a rural and largely self-sufficient society.

For some time, only the Crown was permitted to purchase land from Maori. This land was then either resold or leased to settlers. Many Maori felt – and many still feel – that they were forced to give up land, effectively at gunpoint, in return for a pittance. Perhaps they did not always grasp that land, once sold, was lost forever. Conflict over land led to intermittent warfare between Maori and settlers, especially in the 1860s. There was brutality on both sides, but the Europeans on the whole showed more restraint in New Zealand than in North America, Australia, or Southern Africa.

Maori actually required less land in the nineteenth century because their numbers were falling, possibly by half between the late eighteenth and late nineteenth centuries. By the 1860s, Maori were outnumbered by British settlers. The introduction of European diseases, alcohol, and guns contributed to the decline in population. Increased mobility and contact between tribes may also have spread disease. The Maori population did not begin to recover until the twentieth century.

Gold was discovered in several parts of New Zealand (including Thames and Otago) in the mid-nineteenth century, but the introduction of sheep farming in the 1850s gave a more enduring boost to the economy. Australian and New Zealand wool was in high demand in the textile mills of Yorkshire. Sheep farming necessitated the clearing of native forests and the planting of grasslands, which changed the appearance of large tracts of New Zealand. This work was expensive, and easy access to the London capital market was critical. Economic relations between New Zealand and Britain were strong, and remained so until the 1970s.

Between the mid-1870s and mid-1890s, New Zealand was adversely affected by weak export prices, and in some years there was net emigration. But wool prices recovered in the 1890s, just as new exports – meat and dairy produce – were coming to prominence. Until the advent of refrigeration in the early 1880s, New Zealand did not export meat and dairy produce. After the introduction of refrigeration, however, New Zealand foodstuffs found their way on to the dinner tables of working class families in Britain, but not the tables of the middle and upper classes, as they could afford fresh produce.

In comparative terms, the New Zealand economy was in its heyday in the two decades before 1914. New Zealand (though not its Maori shadow, Aotearoa) was a wealthy, dynamic, and egalitarian society. The total population in 1914 was slightly above one million. Exports consisted almost entirely of land-intensive pastoral commodities. Manufactures loomed large in New Zealand’s imports. High labor costs, and the absence of scale economies in the tiny domestic market, hindered industrialization, though there was some processing of export commodities and imports.

War, Depression and Recovery, 1914-38

World War One disrupted agricultural production in Europe, and created a robust demand for New Zealand’s primary exports. Encouraged by high export prices, New Zealand farmers borrowed and invested heavily between 1914 and 1920. Land exchanged hands at very high prices. Unfortunately, the early twenties brought the start of a prolonged slump in international commodity markets. Many farmers struggled to service and repay their debts.

The global economic downturn, beginning in 1929-30, was transmitted to New Zealand by the collapse in commodity prices on the London market. Farmers bore the brunt of the depression. At the trough, in 1931-32, net farm income was negative. Declining commodity prices increased the already onerous burden of servicing and repaying farm mortgages. Meat freezing works, woolen mills, and dairy factories were caught in the spiral of decline. Farmers had less to spend in the towns. Unemployment rose, and some of the urban jobless drifted back to the family farm. The burden of external debt, the bulk of which was in sterling, rose dramatically relative to export receipts. But a protracted balance of payments crisis was avoided, since the demand for imports fell sharply in response to the drop in incomes. The depression was not as serious in New Zealand as in many industrial countries. Prices were more flexible in the primary sector and in small business than in modern, capital-intensive industry. Nevertheless, the experience of depression profoundly affected New Zealanders’ attitudes towards the international economy for decades to come.

At first, there was no reason to expect that the downturn in 1929-30 was the prelude to the worst slump in history. As tax and customs revenue fell, the government trimmed expenditure in an attempt to balance the budget. Only in 1931 was the severity of the crisis realized. Further cuts were made in public spending. The government intervened in the labor market, securing an order for an all-round reduction in wages. It pressured and then forced the banks to reduce interest rates. The government sought to maintain confidence and restore prosperity by helping farms and other businesses to lower costs. But these policies did not lead to recovery.

Several factors contributed to the recovery that commenced in 1933-34. The New Zealand pound was devalued by 14 percent against sterling in January 1933. As most exports were sold for sterling, which was then converted into New Zealand pounds, the income of farmers was boosted at a stroke of the pen. Devaluation increased the money supply. Once economic actors, including the banks, were convinced that the devaluation was permanent, there was an increase in confidence and in lending. Other developments played their part. World commodity prices stabilized, and then began to pick up. Pastoral output and productivity continued to rise. The 1932 Ottawa Agreements on imperial trade strengthened New Zealand’s position in the British market at the expense of non-empire competitors such as Argentina, and prefigured an increase in the New Zealand tariff on non-empire manufactures. As was the case elsewhere, the recovery in New Zealand was not the product of a coherent economic strategy. When beneficial policies were adopted it was as much by accident as by design.

Once underway, however, New Zealand’s recovery was comparatively rapid and persisted over the second half of the thirties. A Labour government, elected towards the end of 1935, nationalized the central bank (the Reserve Bank of New Zealand). The government instructed the Reserve Bank to create advances in support of its agricultural marketing and state housing schemes. It became easier to obtain borrowed funds.

An Insulated Economy, 1938-1984

A balance of payments crisis in 1938-39 was met by the introduction of administrative restrictions on imports. Labour had not been prepared to deflate or devalue – the former would have increased unemployment, while the latter would have raised working class living costs. Although intended as a temporary expedient, the direct control of imports became a distinctive feature of New Zealand economic policy until the mid-1980s.

The doctrine of “insulationism” was expounded during the 1940s. Full employment was now the main priority. In the light of disappointing interwar experience, there were doubts about the ability of the pastoral sector to provide sufficient work for New Zealand’s growing population. There was a desire to create more industrial jobs, even though there seemed no prospect of achieving scale economies within such a small country. Uncertainty about export receipts, the need to maintain a high level of domestic demand, and the competitive weakness of the manufacturing sector, appeared to justify the retention of quantitative import controls.

After 1945, many Western countries retained controls over current account transactions for several years. When these controls were relaxed and then abolished in the fifties and early sixties, the anomalous nature of New Zealand’s position became more visible. Although successive governments intended to liberalize, in practice they achieved little, except with respect to trade with Australia.

The collapse of the Korean War commodity boom, in the early 1950s, marked an unfortunate turning point in New Zealand’s economic history. International conditions were unpropitious for the pastoral sector in the second half of the twentieth century. Despite the aspirations of GATT, the United States, Western Europe and Japan restricted agricultural imports, especially of temperate foodstuffs, subsidized their own farmers and, in the case of the Americans and the Europeans, dumped their surpluses in third markets. The British market, which remained open until 1973, when the United Kingdom was absorbed into the EEC, was too small to satisfy New Zealand. Moreover, even the British resorted to agricultural subsidies. Compared with the price of industrial goods, the price of agricultural produce tended to weaken over the long term.

Insulation was a boon to manufacturers, and New Zealand developed a highly diversified industrial structure. But competition was ineffectual, and firms were able to pass cost increases on to the consumer. Import barriers induced many British, American, and Australian multinationals to establish plants in New Zealand. The protected industrial economy did have some benefits. It created jobs – there was full employment until the 1970s – and it increased the stock of technical and managerial skills. But consumers and farmers were deprived of access to cheaper – and often better quality – imported goods. Their interests and welfare were neglected. Competing demand from protected industries also raised the costs of farm inputs, including labor power, and thus reduced the competitiveness of New Zealand’s key export sector.

By the early 1960s, policy makers had realized that New Zealand was falling behind in the race for greater prosperity. The British food market was under threat, as the Macmillan government began a lengthy campaign to enter the protectionist EEC. New Zealand began to look for other economic partners, and the most obvious candidate was Australia. In 1901, New Zealand had declined to join the new federation of Australian colonies. Thus it had been excluded from the Australian common market. After lengthy negotiations, a partial New Zealand-Australia Free Trade Agreement (NAFTA) was signed in 1965. Despite initial misgivings, many New Zealand firms found that they could compete in the Australian market, where tariffs against imports from the rest of the world remained quite high. But this had little bearing on their ability to compete with European, Asian, and North American firms. NAFTA was given renewed impetus by the Closer Economic Relations (CER) agreement of 1983.

Between 1973 and 1984, New Zealand governments were overwhelmed by a group of inter-related economic crises, including two serious supply shocks (the oil crises), rising inflation, and increasing unemployment. Robert Muldoon, the National Party (conservative) prime minister between 1975 and 1984, pursued increasingly erratic macroeconomic policies. He tightened government control over the economy in the early eighties. There were dramatic fluctuations in inflation and in economic growth. In desperation, Muldoon imposed a wage and price freeze in 1982-84. He also mounted a program of large-scale investments, including the expansion of a steel works, and the construction of chemical plants and an oil refinery. By means of these investments, he hoped to reduce the import bill and secure a durable improvement in the balance of payments. But the “Think Big” strategy failed – the projects were inadequately costed, and inherently risky. Although Muldoon’s intention had been to stabilize the economy, his policies had the opposite effect.

Economic Reform, 1984-2000

Muldoon’s policies were discredited, and in 1984 the Labour Party came to power. All other economic strategies having failed, Labour resolved to deregulate and restore the market process. (This seemed very odd at the time.) Within a week of the election, virtually all controls over interest rates had been abolished. Financial markets were deregulated, and, in March 1985, the New Zealand dollar was floated. Other changes followed, including the sale of public sector trading organizations, the reduction of tariffs and the elimination of import licensing. However, reform of the labor market was not completed until the early 1990s, by which time National (this time without Muldoon or his policies) was back in office.

Once credit was no longer rationed, there was a large increase in private sector borrowing, and a boom in asset prices. Numerous speculative investment and property companies were set up in the mid-eighties. New Zealand’s banks, which were not used to managing risk in a deregulated environment, scrambled to lend to speculators in an effort not to miss out on big profits. Many of these ventures turned sour, especially after the 1987 share market crash. Banks were forced to reduce their lending, to the detriment of sound as well as unsound borrowers.

Tight monetary policy and financial deregulation led to rising interest rates after 1984. The New Zealand dollar appreciated strongly. Farmers bore the initial brunt of high borrowing costs and a rising real exchange rate. Manufactured imports also became more competitive, and many inefficient firms were forced to close. Unemployment rose in the late eighties and early nineties. The early 1990s were marked by an international recession, which was particularly painful in New Zealand, not least because of the high hopes raised by the post-1984 reforms.

An economic recovery began towards the end of 1991. With a brief interlude in 1998, strong growth persisted for the remainder of the decade. Confidence was gradually restored to the business sector. Unemployment began to recede. After a lengthy time lag, the economic reforms seemed to be paying off for the majority of the population.

Large structural changes took place after 1984. Factors of production switched out of the protected manufacturing sector, and were drawn into services. Tourism boomed as the relative cost of international travel fell. The face of the primary sector also changed, and the wine industry began to penetrate world markets. But not all manufacturers struggled. Some firms adapted to the new environment and became more export-oriented. For instance, a small engineering company, Scott Technology, became a world leader in the provision of equipment for the manufacture of refrigerators and washing machines.

Annual inflation was reduced to low single digits by the early nineties. Price stability was locked in through the 1989 Reserve Bank Act. This legislation gave the central bank operational autonomy, while compelling it to focus on the achievement and maintenance of price stability rather than other macroeconomic objectives. The Reserve Bank of New Zealand was the first central bank in the world to adopt a regime of inflation targeting. The 1994 Fiscal Responsibility Act committed governments to sound finance and the reduction of public debt.

By 2000, New Zealand’s population was approaching four million. Overall, the reforms of the eighties and nineties were responsible for creating a more competitive economy. New Zealand’s economic decline relative to the rest of the OECD was halted, though it was not reversed. In the nineties, New Zealand enjoyed faster economic growth than either Germany or Japan, an outcome that would have been inconceivable a few years earlier. But many New Zealanders were not satisfied. In particular, they were galled that their closest neighbor, Australia, was growing even faster. Australia, however, was an inherently much wealthier country with massive mineral deposits.

Assessment

Several explanations have been offered for New Zealand’s relatively poor economic performance during the twentieth century.

Wool, meat, and dairy produce were the foundations of New Zealand’s prosperity in Victorian and Edwardian times. After 1920, however, international market conditions were generally unfavorable to pastoral exports. New Zealand had the wrong comparative advantage to enjoy rapid growth in the twentieth century.

Attempts to diversify were only partially successful. High labor costs and the small size of the domestic market hindered the efficient production of standardized labor-intensive goods (e.g. garments) and standardized capital-intensive goods (e.g. autos). New Zealand might have specialized in customized and skill-intensive manufactures, but the policy environment was not conducive to the promotion of excellence in niche markets. Between 1938 and the 1980s, Latin American-style trade policies fostered the growth of a ramshackle manufacturing sector. Only in the late eighties did New Zealand decisively reject this regime.

Geographical and geological factors also worked to New Zealand’s disadvantage. Australia drew ahead of New Zealand in the 1960s, following the discovery of large mineral deposits for which there was a big market in Japan. Staple theory suggests that developing countries may industrialize successfully by processing their own primary products, instead of by exporting them in a raw state. Canada had coal and minerals, and became a significant industrial power. But New Zealand’s staples of wool, meat and dairy produce offered limited downstream potential.

Canada also took advantage of its proximity to the U.S. market, and access to U.S. capital and technology. American-style institutions in the labor market, business, education and government became popular in Canada. New Zealand and Australia relied on, arguably inferior, British-style institutions. New Zealand was a long way from the world’s economic powerhouses, and it was difficult for its firms to establish and maintain contact with potential customers and collaborators in Europe, North America, or Asia.

Clearly, New Zealand’s problems were not all of its own making. The elimination of agricultural protectionism in the northern hemisphere would have given a huge boost the New Zealand economy. On the other hand, in the period between the late 1930s and mid-1980s, New Zealand followed inward-looking economic policies that hindered economic efficiency and flexibility.

References

Bassett, Michael. The State in New Zealand, 1840-1984. Auckland: Auckland University Press, 1998.

Belich, James. Making Peoples: A History of the New Zealanders from Polynesian Settlement to the End of the Nineteenth Century, Auckland: Penguin, 1996.

Condliffe, John B. New Zealand in the Making. London: George Allen & Unwin, 1930.

Dalziel, Paul. “New Zealand’s Economic Reforms: An Assessment.” Review of Political Economy 14, no. 2 (2002): 31-46.

Dalziel, Paul and Ralph Lattimore. The New Zealand Macroeconomy: Striving for Sustainable Growth with Equity. Melbourne: Oxford University Press, fifth edition, 2004.

Easton, Brian. In Stormy Seas: The Post-War New Zealand Economy. Dunedin: University of Otago Press, 1997.

Endres, Tony and Ken Jackson. “Policy Responses to the Crisis: Australasia in the 1930s.” In Capitalism in Crisis: International Responses to the Great Depression, edited by Rick Garside, 148-65. London: Pinter, 1993.

Evans, Lewis, Arthur Grimes, and Bryce Wilkinson (with David Teece), “Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency.” Journal of Economic Literature 34, no. 4 (1996): 1856-1902.

Gould, John D. The Rake’s Progress: the New Zealand Economy since 1945. Auckland: Hodder and Stoughton, 1982.

Greasley, David and Les Oxley. “A Tale of Two Dominions: Comparing the Macroeconomic Records of Australia and Canada since 1870.” Economic History Review 51, no. 2 (1998): 294-318.

Greasley, David and Les Oxley. “Outside the Club: New Zealand’s Economic Growth, 1870-1993.” International Review of Applied Economics 14, no. 2 (1999): 173-92.

Greasley, David and Les Oxley. “Regime Shift and Fast Recovery on the Periphery: New Zealand in the 1930s.” Economic History Review 55, no. 4 (2002): 697-720.

Hawke, Gary R. The Making of New Zealand: An Economic History. Cambridge: Cambridge University Press, 1985.

Jones, Steve R.H. “Government Policy and Industry Structure in New Zealand, 1900-1970.” Australian Economic History Review 39, no, 3 (1999): 191-212.

Mabbett, Deborah. Trade, Employment and Welfare: A Comparative Study of Trade and Labour Market Policies in Sweden and New Zealand, 1880-1980. Oxford: Clarendon Press, 1995.

Maddison, Angus. Dynamic Forces in Capitalist Development. Oxford: Oxford University Press, 1991.

Maddison, Angus. The World Economy: Historical Statistics. Paris: OECD, 2003.

McKinnon, Malcolm. Treasury: 160 Years of the New Zealand Treasury. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003.

Schedvin, Boris. “Staples and Regions of the Pax Britannica.” Economic History Review 43, no. 4 (1990): 533-59.

Silverstone, Brian, Alan Bollard, and Ralph Lattimore, editors. A Study of Economic Reform: The Case of New Zealand. Amsterdam: Elsevier, 1996.

Singleton, John. “New Zealand: Devaluation without a Balance of Payments Crisis.” In The World Economy and National Economies in the Interwar Slump, edited by Theo Balderston, 172-90. Basingstoke: Palgrave, 2003.

Singleton, John and Paul L. Robertson. Economic Relations between Britain and Australasia, 1945-1970. Basingstoke: Palgrave, 2002.

Ville, Simon. The Rural Entrepreneurs: A History of the Stock and Station Agent Industry in Australia and New Zealand. Cambridge: Cambridge University Press, 2000.

Citation: Singleton, John. “New Zealand in the Nineteenth and Twentieth Centuries”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/an-economic-history-of-new-zealand-in-the-nineteenth-and-twentieth-centuries/

Labor Unions in the United States

Gerald Friedman, University of Massachusetts at Amherst

Unions and Collective Action

In capitalist labor markets, which developed in the nineteenth-century in the United States and Western Europe, workers exchange their time and effort for wages. But even while laboring under the supervision of others, wage earners have never been slaves, because they have recourse from abuse. They can quit to seek better employment. Or they are free to join with others to take collective action, forming political movements or labor unions. By the end of the nineteenth century, labor unions and labor-oriented political parties had become major forces influencing wages and working conditions. This article explores the nature and development of labor unions in the United States. It reviews the growth and recent decline of the American labor movement and makes comparisons with the experience of foreign labor unions to clarify particular aspects of the history of labor unions in the United States.

Unions and the Free-Rider Problem

Quitting, exit, is straightforward, a simple act for individuals unhappy with their employment. By contrast, collective action, such as forming a labor union, is always difficult because it requires that individuals commit themselves to produce “public goods” enjoyed by all, including those who “free ride” rather than contribute to the group effort. If the union succeeds, free riders receive the same benefits as do activists; but if it fails, the activists suffer while those who remained outside lose nothing. Because individualist logic leads workers to “free ride,” unions cannot grow by appealing to individual self-interest (Hirschman, 1970; 1982; Olson, 1966; Gamson, 1975).

Union Growth Comes in Spurts

Free riding is a problem for all collective movements, including Rotary Clubs, the Red Cross, and the Audubon Society. But unionization is especially difficult because unions must attract members against the opposition of often-hostile employers. Workers who support unions sacrifice money and risk their jobs, even their lives. Success comes only when large numbers simultaneously follow a different rationality. Unions must persuade whole groups to abandon individualism to throw themselves into the collective project. Rarely have unions grown incrementally, gradually adding members. Instead, workers have joined unions en masse in periods of great excitement, attracted by what the French sociologist Emile Durkheim labeled “collective effervescence” or the joy of participating in a common project without regard for individual interest. Growth has come in spurts, short periods of social upheaval punctuated by major demonstrations and strikes when large numbers see their fellow workers publicly demonstrating a shared commitment to the collective project. Union growth, therefore, is concentrated in short periods of dramatic social upheaval; in the thirteen countries listed in Tables 1 and 2, 67 percent of growth comes in only five years, and over 90 percent in only ten years. As Table 3 shows, in these thirteen countries, unions grew by over 10 percent a year in years with the greatest strike activity but by less than 1 percent a year in the years with the fewest strikers (Friedman, 1999; Shorter and Tilly, 1974; Zolberg, 1972).

Table 1
Union Members per 100 Nonagricultural Workers, 1880-1985: Selected Countries

Year Canada US Austria Denmark France Italy Germany Netherlands Norway Sweden UK Australia Japan
1880 n.a. 1.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
1900 4.6 7.5 n.a. 20.8 5.0 n.a. 7.0 n.a. 3.4 4.8 12.7 n.a. n.a.
1914 8.6 10.5 n.a. 25.1 8.1 n.a. 16.9 17.0 13.6 9.9 23.0 32.8 n.a.
1928 11.6 9.9 41.7 39.7 8.0 n.a. 32.5 26.0 17.4 32.0 25.6 46.2 n.a.
1939 10.9 20.7 n.a. 51.8 22.4 n.a. n.a. 32.5 57.0 53.6 31.6 39.2 n.a.
1947 24.6 31.4 64.6 55.9 40.0 n.a. 29.1 40.4 55.1 64.6 44.5 52.9 45.3
1950 26.3 28.4 62.3 58.1 30.2 49.0 33.1 43.0 58.4 67.7 44.1 56.0 46.2
1960 28.3 30.4 63.4 64.4 20.0 29.6 37.1 41.8 61.5 73.0 44.2 54.5 32.2
1975 35.6 26.4 58.5 66.6 21.4 50.1 38.2 39.1 60.5 87.2 51.0 54.7 34.4
1985 33.7 18.9 57.8 82.2 14.5 51.0 39.3 28.6 65.3 103.0 44.2 51.5 28.9

Note: This table shows the unionization rate, the share of nonagricultural workers belonging to unions, in different countries in different years, 1880-1985. Because union membership often includes unemployed and retired union members it may exceed the number of employed workers, giving a unionization rate of greater than 100 percent.

Table 2
Union Growth in Peak and Other Years

Country Years Membership Growth Share of Growth (%) Excess Growth (%)
Top 5 Years Top 10 Years All Years 5 Years 10 Years 5 Years 10 Years
Australia 83 720 000 1 230 000 3 125 000 23.0 39.4 17.0 27.3
Austria 52 5 411 000 6 545 000 3 074 000 176.0 212.9 166.8 194.4
Canada 108 855 000 1 532 000 4 028 000 21.2 38.0 16.6 28.8
Denmark 85 521 000 795 000 1 883 000 27.7 42.2 21.8 30.5
France 92 6 605 000 7 557 000 2 872 000 230.0 263.1 224.5 252.3
Germany 82 10 849 000 13 543 000 9 120 000 119.0 148.5 112.9 136.3
Italy 38 3 028 000 4 671 000 3 713 000 81.6 125.8 68.4 99.5
Japan 43 4 757 000 6 692 000 8 983 000 53.0 74.5 41.3 51.2
Netherlands 71 671 000 1 009 000 1 158 000 57.9 87.1 50.9 73.0
Norway 85 304 000 525 000 1 177 000 25.8 44.6 19.9 32.8
Sweden 99 633 000 1 036 000 3 859 000 16.4 26.8 11.4 16.7
UK 96 4 929 000 8 011 000 8 662 000 56.9 92.5 51.7 82.1
US 109 10 247 000 14 796 000 22 293 000 46.0 66.4 41.4 57.2
Total 1043 49 530 000 67 942 000 73 947 000 67.0 91.9 60.7 79.4

Note: This table shows that most union growth comes in a few years. Union membership growth (net of membership losses) has been calculated for each country for each year. Years were then sorted for each country according to membership growth. This table reports growth for each country for the five and the ten years with the fastest growth and compares this with total growth over all years for which data are available. Excess growth has been calculated as the difference between the share of growth in the top five or ten years and the share that would have come in these periods if growth had been distributed evenly across all years.

Note that years of rapid growth are not necessarily contiguous. There can be more growth in years of rapid growth than over the entire period. This is because some is temporary when years of rapid growth are followed by years of decline.

Sources: Bain and Price (1980): 39, Visser (1989)

Table 3
Impact of Strike Activity on Union Growth
Average Union Membership Growth in Years Sorted by Proportion of Workers Striking

Country Striker Rate Quartile Change
Lowest Third Second Highest
Australia 5.1 2.5 4.5 2.7 -2.4
Austria 0.5 -1.9 0.4 2.4 1.9
Canada 1.3 1.9 2.3 15.8 14.5
Denmark 0.3 1.1 3.0 11.3 11.0
France 0.0 2.1 5.6 17.0 17.0
Germany -0.2 0.4 1.3 20.3 20.5
Italy -2.2 -0.3 2.3 5.8 8.0
Japan -0.2 5.1 3.0 4.3 4.5
Netherlands -0.9 1.2 3.5 6.3 7.2
Norway 1.9 4.3 8.6 10.3 8.4
Sweden 2.5 3.2 5.9 16.9 14.4
UK 1.7 1.7 1.9 3.4 1.7
US -0.5 0.6 2.1 19.9 20.4
Total: Average 0.72 1.68 3.42 10.49 9.78

Note: This table shows that except in Australia unions grew fastest in years with large number of strikers. The proportion of workers striking was calculated for each country for each year as the number of strikers divided by the nonagricultural labor force. Years were then sorted into quartiles, each including one-fourth of the years, according to this striker rate statistic. The average annual union membership growth rate was then calculated for each quartile as the mean of the growth rate in each year in the quartile.

Rapid Union Growth Provokes a Hostile Reaction

These periods of rapid union growth end because social upheaval provokes a hostile reaction. Union growth leads employers to organize, to discover their own collective interests. Emulating their workers, they join together to discharge union activists, to support each other in strikes, and to demand government action against unions. This rising opposition ends periods of rapid union growth, beginning a new phase of decline followed by longer periods of stagnant membership. The weakest unions formed during the union surge succumb to the post-boom reaction; but if enough unions survive they leave a movement larger and broader than before.

Early Labor Unions, Democrats and Socialists

Guilds

Before modern labor unions, guilds united artisans and their employees. Craftsmen did the work of early industry, “masters” working beside “journeymen” and apprentices in small workplaces. Throughout the cities and towns of medieval Europe, guilds regulated production by setting minimum prices and quality, and capping wages, employment, and output. Controlled by independent craftsmen, “masters” who employed journeymen and trained apprentices, guilds regulated industry to protect the comfort and status of the masters. Apprentices and journeymen benefited from guild restrictions only when they advanced to master status.

Guild power was gradually undermined in the early-modern period. Employing workers outside the guild system, including rural workers and semiskilled workers in large urban workplaces, merchants transformed medieval industry. By the early 1800s, few could anticipate moving up to becoming a master artisan or owning their own establishment. Instead, facing the prospect of a lifetime of wage labor punctuated by periods of unemployment, some wage earners began to seek a collective regulation of their individual employment (Thompson, 1966; Scott, 1974; Dawley, 1976; Sewell, 1980; Wilentz, 1984; Blewett, 1988).

The labor movement within the broader movement for democracy

This new wage-labor regime led to the modern labor movement. Organizing propertyless workers who were laboring for capitalists, organized labor formed one wing of a broader democratic movement struggling for equality and for the rights of commoners (Friedman, 1998). Within the broader democratic movement for legal and political equality, labor fought the rise of a new aristocracy that controlled the machinery of modern industry just as the old aristocracy had monopolized land. Seen in this light, the fundamental idea of the labor movement, that employees should have a voice in the management of industry, is comparable to the demand that citizens should have a voice in the management of public affairs. Democratic values do not, by any means, guarantee that unions will be fair and evenhanded to all workers. In the United States, by reserving good jobs for their members, unions of white men sometimes contributed to the exploitation of women and nonwhites. Democracy only means that exploitation will be carried out at the behest of a political majority rather than at the say of an individual capitalist (Roediger, 1991; Arnesen, 2001; Foner, 1974; 1979; Milkman, 1985).

Craft unions’ strategy

Workers formed unions to voice their interests against their employers, and also against other workers. Rejecting broad alliances along class lines, alliances uniting workers on the basis of their lack of property and their common relationship with capitalists, craft unions followed a narrow strategy, uniting workers with the same skill against both the capitalists and against workers in different trades. By using their monopoly of knowledge of the work process to restrict access to the trade, craft unions could have a strong bargaining position that was enhanced by alliances with other craftsmen to finance long strikes. A narrow craft strategy was followed by the first successful unions throughout Europe and America, especially in small urban shops using technologies that still depended on traditional specialized skills, including printers, furniture makers, carpenters, gold beaters and jewelry makers, iron molders, engineers, machinists, and plumbers. Craft unions’ characteristic action was the small, local strike, the concerted withdrawal of labor by a few workers critical to production. Typically, craft unions would present a set of demands to local employers on a “take-it-or-leave-it” basis; either the employer accepted their demands or fought a contest of strength to determine whether the employers could do without the skilled workers for longer than the workers could manage without their jobs.

The craft strategy offered little to the great masses of workers. Because it depends on restricting access to trades it could not be applied by common laborers, who were untrained, nor by semi-skilled employees in modern mass-production establishments whose employers trained them on-the-job. Shunned by craft unions, most women and African-Americans in the United States were crowded into nonunion occupations. Some sought employment as strikebreakers in occupations otherwise monopolized by craft unions controlled by white, native-born males (Washington, 1913; Whatley, 1993).

Unions among unskilled workers

To form unions, the unskilled needed a strategy of the weak that would utilize their numbers rather than specialized knowledge and accumulated savings. Inclusive unions have succeeded but only when they attract allies among politicians, state officials, and the affluent public. Sponsoring unions and protecting them from employer repression, allies can allow organization among workers without specialized skills. When successful, inclusive unions can grow quickly in mass mobilization of common laborers. This happened, for example, in Germany at the beginning of the Weimar Republic, during the French Popular Front of 1936-37, and in the United States during the New Deal of the 1930s. These were times when state support rewarded inclusive unions for organizing the unskilled. The bill for mass mobilization usually came later. Each boom was followed by a reaction against the extensive promises of the inclusive labor movement when employers and conservative politicians worked to put labor’s genie back in the bottle.

Solidarity and the Trade Unions

Unionized occupations of the late 1800s

By the late-nineteenth century, trade unions had gained a powerful position in several skilled occupations in the United States and elsewhere. Outside of mining, craft unions were formed among well-paid skilled craft workers — workers whom historian Eric Hobsbawm labeled the “labor aristocracy” (Hobsbawm, 1964; Geary, 1981). In 1892, for example, nearly two-thirds of British coal miners were union members, as were a third of machinists, millwrights and metal workers, cobblers and shoe makers, glass workers, printers, mule spinners, and construction workers (Bain and Price, 1980). French miners had formed relatively strong unions, as had skilled workers in the railroad operating crafts, printers, jewelry makers, cigar makers, and furniture workers (Friedman, 1998). Cigar makers, printers, furniture workers, some construction and metal craftsmen took the lead in early German unions (Kocka, 1986). In the United States, there were about 160,000 union members in 1880, including 120,000 belonging to craft unions, including carpenters, engineers, furniture makers, stone-cutters, iron puddlers and rollers, printers, and several railroad crafts. Another 40,000 belonged to “industrial” unions organized without regard for trade. About half of these were coal miners; most of the rest belonged to the Knights of Labor (KOL) (Friedman, 1999).

The Knights of Labor

In Europe, these craft organizations were to be the basis of larger, mass unions uniting workers without regard for trade or, in some cases, industry (Ansell, 2001). This process began in the United States in the 1880s when craft workers in the Knights of Labor reached out to organize more broadly. Formed by skilled male, native-born garment cutters in 1869, the Knights of Labor would seem an odd candidate to mobilize the mass of unskilled workers. But from a few Philadelphia craft workers, the Knights grew to become a national and even international movement. Membership reached 20,000 in 1881 and grew to 100,000 in 1885. Then, in 1886, when successful strikes on some western railroads attracted a mass of previously unorganized unskilled workers, the KOL grew to a peak membership of a million workers. For a brief time, the Knights of Labor was a general movement of the American working class (Ware, 1929; Voss, 1993).

The KOL became a mass movement with an ideology and program that united workers without regard for occupation, industry, race or gender (Hattam, 1993). Never espousing Marxist or socialist doctrines, the Knights advanced an indigenous form of popular American radicalism, a “republicanism” that would overcome social problems by extending democracy to the workplace. Valuing citizens according to their work, their productive labor, the Knights were true heirs of earlier bourgeois radicals. Open to all producers, including farmers and other employers, they excluded only those seen to be parasitic on the labor of producers — liquor dealers, gamblers, bankers, stock manipulators and lawyers. Welcoming all others without regard for race, gender, or skill, the KOL was the first American labor union to attract significant numbers of women, African-Americans, and the unskilled (Foner, 1974; 1979; Rachleff, 1984).

The KOL’s strategy

In practice, most KOL local assemblies acted like craft unions. They bargained with employers, conducted boycotts, and called members out on strike to demand higher wages and better working conditions. But unlike craft unions that depended on the bargaining leverage of a few strategically positioned workers, the KOL’s tactics reflected its inclusive and democratic vision. Without a craft union’s resources or control over labor supply, the Knights sought to win labor disputes by widening them to involve political authorities and the outside public able to pressure employers to make concessions. Activists hoped that politicizing strikes would favor the KOL because its large membership would tempt ambitious politicians while its members’ poverty drew public sympathy.

In Europe, a strategy like that of the KOL succeeded in promoting the organization of inclusive unions. But it failed in the United States. Comparing the strike strategies of trade unions and the Knights provides insight into the survival and eventual success of the trade unions and their confederation, the American Federation of Labor (AFL) in late-nineteenth century America. Seeking to transform industrial relations, local assemblies of the KOL struck frequently with large but short strikes involving skilled and unskilled workers. The Knights’ industrial leverage depended on political and social influence. It could succeed where trade unions would not go because the KOL strategy utilized numbers, the one advantage held by common laborers. But this strategy could succeed only where political authorities and the outside public might sympathize with labor. Later industrial and regional unions tried the same strategy, conducting short but large strikes. By demonstrating sufficient numbers and commitment, French and Italian unions, for example, would win from state officials concessions they could not force from recalcitrant employers (Shorter and Tilly, 1974; Friedman, 1998). But compared with the small strikes conducted by craft unions, “solidarity” strikes must walk a fine line, aggressive enough to draw attention but not so threatening to provoke a hostile reaction from threatened authorities. Such a reaction doomed the KOL.

The Knights’ collapse in 1886

In 1886, the Knights became embroiled in a national general strike demanding an eight-hour workday, the world’s first May Day. This led directly to the collapse of the KOL. The May Day strike wave in 1886 and the bombing at Haymarket Square in Chicago provoked a “red scare” of historic proportions driving membership down to half a million in September 1887. Police in Chicago, for example, broke up union meetings, seized union records, and even banned the color red from advertisements. The KOL responded politically, sponsoring a wave of independent labor parties in the elections of 1886 and supporting the Populist Party in 1890 (Fink, 1983). But even relatively strong showings by these independent political movements could not halt the KOL’s decline. By 1890, its membership had fallen by half again, and it fell to under 50,000 members by 1897.

Unions and radical political movements in Europe in the late 1800s

The KOL spread outside the United States, attracting an energetic following in the Canada, the United Kingdom, France, and other European countries. Industrial and regional unionism fared better in these countries than in the United States. Most German unionists belonged to industrial unions allied with the Social Democratic Party. Under Marxist leadership, unions and political party formed a centralized labor movement to maximize labor’s political leverage. English union membership was divided between members of a stable core of craft unions and a growing membership in industrial and regional unions based in mining, cotton textiles, and transportation. Allied with political radicals, these industrial and regional unions formed the backbone of the Labor Party, which held the balance of power in British politics after 1906.

The most radical unions were found in France. By the early 1890s, revolutionary syndicalists controlled the national union center, the Confédération générale du travail (or CGT), which they tried to use as a base for a revolutionary general strike where the workers would seize economic and political power. Consolidating craft unions into industrial and regional unions, the Bourses du travail, syndicalists conducted large strikes designed to demonstrate labor’s solidarity. Paradoxically, the syndicalists’ large strikes were effective because they provoked friendly government mediation. In the United States, state intervention was fatal for labor because government and employers usually united to crush labor radicalism. But in France, officials were more concerned to maintain a center-left coalition with organized labor against reactionary employers opposed to the Third Republic. State intervention helped French unionists to win concessions beyond any they could win with economic leverage. A radical strategy of inclusive industrial and regional unionism could succeed in France because the political leadership of the early Third Republic needed labor’s support against powerful economic and social groups who would replace the Republic with an authoritarian regime. Reminded daily of the importance of republican values and the coalition that sustained the Republic, French state officials promoted collective bargaining and labor unions. Ironically, it was the support of liberal state officials that allowed French union radicalism to succeed, and allowed French unions to grow faster than American unions and to organize the semi-skilled workers in the large establishments of France’s modern industries (Friedman, 1997; 1998).

The AFL and American Exceptionalism

By 1914, unions outside the United States had found that broad organization reduced the availability of strike breakers, advanced labor’s political goals, and could lead to state intervention on behalf of the unions. The United States was becoming exceptional, the only advanced capitalist country without a strong, united labor movement. The collapse of the Knights of Labor cleared the way for the AFL. Formed in 1881 as the Federation of Trade and Labor Unions, the AFL was organized to uphold the narrow interests of craft workers against the general interests of common laborers in the KOL. In practice, AFL-craft unions were little labor monopolies, able to win concessions because of their control over uncommon skills and because their narrow strategy did not frighten state officials. Many early AFL leaders, notably the AFL’s founding president Samuel Gompers and P. J. McGuire of the Carpenters, had been active in radical political movements. But after 1886, they learned to reject political involvements for fear that radicalism might antagonize state officials or employers and provoke repression.

AFL successes in the early twentieth-century

Entering the twentieth century, the AFL appeared to have a winning strategy. Union membership rose sharply in the late 1890s, doubling between 1896 and 1900 and again between 1900 and 1904. Fewer than 5 percent of industrial wage earners belonged to labor unions in 1895, but this share rose to 7 percent in 1900 and 13 percent in 1904, including over 21 percent of industrial wage earners (workers outside of commerce, government, and the professions). Half of coal miners in 1904 belonged to an industrial union (the United Mine Workers of America), but otherwise, most union members belonged to craft organizations, including nearly half the printers, and a third of cigar makers, construction workers and transportation workers. As shown in Table 4, other pockets of union strength included skilled workers in the metal trades, leather, and apparel. These craft unions had demonstrated their economic power, raising wages by around 15 percent and reducing hours worked (Friedman, 1991; Mullin, 1993).

Table 4
Unionization rates by industry in the United States, 1880-2000

Industry 1880 1910 1930 1953 1974 1983 2000
Agriculture Forestry Fishing 0.0 0.1 0.4 0.6 4.0 4.8 2.1
Mining 11.2 37.7 19.8 64.7 34.7 21.1 10.9
Construction 2.8 25.2 29.8 83.8 38.0 28.0 18.3
Manufacturing 3.4 10.3 7.3 42.4 37.2 27.9 14.8
Transportation Communication Utilities 3.7 20.0 18.3 82.5 49.8 46.4 24.0
Private Services 0.1 3.3 1.8 9.5 8.6 8.7 4.8
Public Employment 0.3 4.0 9.6 11.3 38.0 31.1 37.5
All Private 1.7 8.7 7.0 31.9 22.4 18.4 10.9
All 1.7 8.5 7.1 29.6 24.8 20.4 14.1

Note: This table shows the unionization rate, the share of workers belonging to unions, in different industries in the United States, 1880-1996.

Sources: 1880 and 1910: Friedman (1999): 83; 1930: Union membership from Wolman (1936); employment from United States, Bureau of the Census (1932); 1953: Troy (1957); 1974, 1986, 2000: United States, Current Population Survey.

Limits to the craft strategy

Even at this peak, the craft strategy had clear limits. Craft unions succeeded only in a declining part of American industry among workers still performing traditional tasks where training was through apprenticeship programs controlled by the workers themselves. By contrast, there were few unions in the rapidly growing industries employing semi-skilled workers. Nor was the AFL able to overcome racial divisions and state opposition to organize in the South (Friedman, 2000; Letwin, 1998). Compared with the KOL in the early 1880s, or with France’s revolutionary syndicalist unions, American unions were weak in steel, textiles, chemicals, paper and metal fabrication using technologies without traditional craft skills. AFL strongholds included construction, printing, cigar rolling, apparel cutting and pressing, and custom metal engineering, employed craft workers in relatively small establishments little changed from 25 years earlier (see Table 4).

Dependent on skilled craftsmen’s economic leverage, the AFL was poorly organized to battle large, technologically dynamic corporations. For a brief time, the revolutionary International Workers of the World (IWW), formed in 1905, organized semi-skilled workers in some mass production industries. But by 1914, it too had failed. It was state support that forced powerful French employers to accept unions. Without such assistance, no union strategy could force large American employers to accept unions.

Unions in the World War I Era

The AFL and World War I

For all its limits, it must be acknowledged that the AFL and its craft affiliates survived after their rivals ignited and died. The AFL formed a solid union movement among skilled craftsmen that with favorable circumstances could form the core of a broader union movement like what developed in Europe after 1900. During World War I, the Wilson administration endorsed unionization and collective bargaining in exchange for union support for the war effort. AFL affiliates used state support to organize mass-production workers in shipbuilding, metal fabrication, meatpacking and steel doubling union membership between 1915 and 1919. But when Federal support ended after the war’s end, employers mobilized to crush the nascent unions. The post-war union collapse has been attributed to the AFL’s failings. The larger truth is that American unions needed state support to overcome the entrenched power of capital. The AFL did not fail because of its deficient economic strategy; it failed because it had an ineffective political strategy (Friedman, 1998; Frank, 1994; Montgomery, 1987).

International effects of World War I

War gave labor extraordinary opportunities. Combatant governments rewarded pro-war labor leaders with positions in the expanded state bureaucracy and support for collective bargaining and unions. Union growth also reflected economic conditions when wartime labor shortages strengthened the bargaining position of workers and unions. Unions grew rapidly during and immediately after the war. British unions, for example, doubled their membership between 1914 and 1920, to enroll eight million workers, almost half the nonagricultural labor force (Bain and Price, 1980; Visser, 1989). Union membership tripled in Germany and Sweden, doubled in Canada, Denmark, the Netherlands, and Norway, and almost doubled in the United States (see Table 5 and Table 1). For twelve countries, membership grew by 121 percent between 1913 and 1920, including 119 percent growth in seven combatant countries and 160 percent growth in five neutral states.

Table 5
Impact of World War I on Union Membership Growth
Membership Growth in Wartime and After

12 Countries 7 Combatants 5 Neutrals
War-Time 1913 12 498 000 11 742 000 756 000
1920 27 649 000 25 687 000 1 962 000
Growth 1913-20: 121% 119% 160%
Post-war 1920 27 649 000
1929 18 149 000
Growth 1920-29: -34%

Shift toward the revolutionary left

Even before the war, frustration with the slow pace of social reform had led to a shift towards the revolutionary socialist and syndicalist left in Germany, the United Kingdom, and the United States (Nolan, 1981; Montgomery, 1987). In Europe, frustrations with rising prices, declining real wages and working conditions, and anger at catastrophic war losses fanned the flames of discontent into a raging conflagration. Compared with pre-war levels, the number of strikers rose ten or even twenty times after the war, including 2.5 million strikers in France in 1919 and 1920, compared with 200,000 strikers in 1913, 13 million German strikers, up from 300,000 in 1913, and 5 million American strikers, up from under 1 million in 1913. British Prime Minister Lloyd George warned in March 1919 that “The whole of Europe is filled with the spirit of revolution. There is a deep sense not only of discontent, but of anger and revolt among the workmen . . . The whole existing order in its political, social and economic aspects is questioned by the masses of the population from one end of Europe to the other” (quoted in Cronin, 1983: 22).

Impact of Communists

Inspired by the success of the Bolshevik revolution in Russia, revolutionary Communist Parties were organized throughout the world to promote revolution by organizing labor unions, strikes, and political protest. Communism was a mixed blessing for labor. The Communists included some of labor’s most dedicated activists and organizers who contributed greatly to union organization. But Communist help came at a high price. Secretive, domineering, intolerant of opposition, the Communists divided unions between their dwindling allies and a growing collection of outraged opponents. Moreover, they galvanized opposition, depriving labor of needed allies among state officials and the liberal bourgeoisie.

The “Lean Years”: Welfare Capitalism and the Open Shop

Aftermath of World War I

As with most great surges in union membership, the postwar boom was self-limiting. Helped by a sharp post- war economic contraction, employers and state officials ruthlessly drove back the radical threat, purging their workforce of known union activists and easily absorbing futile strikes during a period of rising unemployment. Such campaigns drove membership down by a third from a 1920 peak of 26 million members in eleven countries in 1920 to fewer than 18 million in 1924. In Austria, France, Germany, and the United States, labor unrest contributed to the election of conservative governments; in Hungary, Italy, and Poland it led to the installation of anti- democratic dictatorships that ruthlessly crushed labor unions. Economic stagnation, state repression, and anti-union campaigns by employers prevented any union resurgence through the rest of the 1920s. By 1929, unions in these eleven countries had added only 30,000 members, one-fifth of one percent.

Injunctions and welfare capitalism

The 1920s was an especially dark period for organized labor in the United States where weaknesses visible before World War I became critical failures. Labor’s opponents used fear of Communism to foment a post-war red scare that targeted union activists for police and vigilante violence. Hundreds of foreign-born activists were deported, and mobs led by the American Legion and the Ku Klux Klan broke up union meetings and destroyed union offices (see, for example, Frank, 1994: 104-5). Judges added law to the campaign against unions. Ignoring the intent of the Clayton Anti-Trust Act (1914) they used anti-trust law and injunctions against unions, forbidding activists from picketing or publicizing disputes, holding signs, or even enrolling new union members. Employers competed for their workers’ allegiance, offering paternalist welfare programs and systems of employee representation as substitutes for independent unions. They sought to build a nonunion industrial relations system around welfare capitalism (Cohen, 1990).

Stagnation and decline

After the promises of the war years, the defeat of postwar union drives in mass production industries like steel and meatpacking inaugurated a decade of union stagnation and decline. Membership fell by a third between 1920 and 1924. Unions survived only in the older trades where employment was usually declining. By 1924, they were almost completely eliminated from the dynamic industries of the second industrial revolution: including steel, automobiles, consumer electronics, chemicals and rubber manufacture.

New Deals for Labor

Great Depression

The nonunion industrial relations system of the 1920s might have endured and produced a docile working class organized in company unions (Brody, 1985). But the welfare capitalism of the 1920s collapsed when the Great Depression of the 1930s exposed its weaknesses and undermined political support for the nonunion, open shop. Between 1929 and 1933, real national income in the United States fell by one third, nonagricultural employment fell by a quarter, and unemployment rose from under 2 million in 1929 to 13 million in 1933, a quarter of the civilian labor force. Economic decline was nearly as great elsewhere, raising unemployment to over 15 percent in Austria, Canada, Germany, and the United Kingdom (Maddison, 1991: 260-61). Only the Soviet Union, with its authoritarian political economy was largely spared the scourge of unemployment and economic collapse — a point emphasized by Communists throughout the 1930s and later. Depression discredited the nonunion industrial relations system by forcing welfare capitalists to renege on promises to stabilize employment and to maintain wages. Then, by ignoring protests from members of employee representation plans, welfare capitalists further exposed the fundamental weakness of their system. Lacking any independent support, paternalist promises had no standing but depended entirely on the variable good will of employers. And sometimes that was not enough (Cohen, 1990).

Depression-era political shifts

Voters, too, lost confidence in employers. The Great Depression discredited the old political economy. Even before Franklin Roosevelt’s election as President of the United States in 1932, American states enacted legislation restricting the rights of creditors and landlords, restraining the use of the injunction in labor disputes, and providing expanded relief for the unemployed (Ely, 1998; Friedman, 2001). European voters abandoned centrist parties, embracing extremists of both left and right, Communists and Fascists. In Germany, the Nazis won, but Popular Front governments uniting Communists and socialists with bourgeois liberals assumed power in other countries, including Sweden, France and Spain. (The Spanish Popular Front was overthrown by a Fascist rebellion that installed a dictatorship led by Francisco Franco.) Throughout there was an impulse to take public control over the economy because free market capitalism and orthodox finance had led to disaster (Temin, 1990).

Economic depression lowers union membership when unemployed workers drop their membership and employers use their stronger bargaining position to defeat union drives (Bain and Elsheikh, 1976). Indeed, union membership fell with the onset of the Great Depression but, contradicting the usual pattern, membership rebounded sharply after 1932 despite high unemployment, rising by over 76 percent in ten countries by 1938 (see Table 6 and Table 1). The fastest growth came in countries with openly pro-union governments. In France, where the Socialist Léon Blum led a Popular Front government, and the United States, during Franklin Roosevelt’s New Deal, membership rose by 160 percent 1933-38. But membership grew by 33 percent in eight other countries even without openly pro-labor governments.

Table 6
Impact of the Great Depression and World War II on Union Membership Growth

11 Countries (no Germany) 10 Countries (no Austria)
Depression 1929 12 401 000 11 508 000
1933 11 455 000 10 802 000
Growth 1929-33 -7.6% -6.1%
Popular Front Period 1933 10 802 000
1938 19 007 000
Growth 1933-38 76.0%
Second World War 1938 19 007 000
1947 35 485 000
Growth 1938-47 86.7%

French unions and the Matignon agreements

French union membership rose from under 900,000 in 1935 to over 4,500,000 in 1937. The Popular Front’s victory in the elections of June 1936 precipitated a massive strike wave and the occupation of factories and workplaces throughout France. Remembered in movie, song and legend, the factory occupations were a nearly spontaneous uprising of French workers that brought France’s economy to a halt. Contemporaries were struck by the extraordinarily cheerful feelings that prevailed, the “holiday feeling” and sense that the strikes were a new sort of non-violent revolution that would overturn hierarchy and replace capitalist authoritarianism with true social democracy (Phillippe and Dubief, 1993: 307-8). After Blum assumed office, he brokered the Matignon agreements, named after the premier’s official residence in Paris. Union leaders and heads of France’s leading employer associations agreed to end the strikes and occupations in exchange for wage increases of around 15 percent, a 40 hour workweek, annual vacations, and union recognition. Codified in statute by the Popular Front government, French unions gained new rights and protections from employer repression. Only then did workers flock into unions. In a few weeks, French unions gained four million members with the fastest growth in the new industries of the second industrial revolution. Unions in metal fabrication and chemicals grew by 1,450 percent and 4,000 percent respectively (Magraw, 1992: 2, 287-88).

French union leader Léon Jouhaux hailed the Matignon agreements as “the greatest victory of the workers’ movement.” It included lasting gains, including annual vacations and shorter workweeks. But Simone Weil described the strikers of May 1936 as “soldiers on leave,” and they were soon returned to work. Regrouping, employers discharged union activists and attacked the precarious unity of the Popular Front government. Fighting an uphill battle against renewed employer resistance, the Popular Front government fell before it could build a new system of cooperative industrial relations. Contained, French unions were unable to maintain their momentum towards industrial democracy. Membership fell by a third in 1937-39.

The National Industrial Recovery Act

A different union paradigm was developed in the United States. Rather than vehicles for a democratic revolution, the New Deal sought to integrate organized labor into a reformed capitalism that recognized capitalist hierarchy in the workplace, using unions only to promote macroeconomic stabilization by raising wages and consumer spending (Brinkley, 1995). Included as part of a program for economic recovery was section 7(a) of the National Industrial Recovery Act (NIRA) giving “employees . . . the right to organize and bargain collectively through representatives of their own choosing . . . free from the interference, restraint, or coercion of employers.” AFL-leader William Green pronounced this a “charter of industrial freedom” and workers rushed into unions in a wave unmatched since the Knights of Labor in 1886. As with the KOL, the greatest increase came among the unskilled. Coal miners, southern textile workers, northern apparel workers, Ohio tire makers, Detroit automobile workers, aluminum, lumber and sawmill workers all rushed into unions. For the first time in fifty years, American unions gained a foothold in mass production industries.

AFL’s lack of enthusiasm

Promises of state support brought common laborers into unions. But once there, the new unionists received little help from aging AFL leaders. Fearing that the new unionists’ impetuous zeal and militant radicalism would provoke repression, AFL leaders tried to scatter the new members among contending craft unions with archaic craft jurisdictions. The new unionists were swept up in the excitement of unity and collective action but a half-century of experience had taught the AFL’s leadership to fear such enthusiasms.

The AFL dampened the union boom of 1933-34, but, again, the larger problem was not with the AFL’s flawed tactics but with its lack of political leverage. Doing little to enforce the promises of Section 7(a), the Federal government left employers free to ignore the law. Some flatly prohibited union organization; others formally honored the law but established anemic employee representation plans while refusing to deal with independent unions (Irons, 2000). By 1935 almost as many industrial establishments had employer-dominated employee- representation plans (27 percent) as had unions (30 percent). The greatest number had no labor organization at all (43 percent).

Birth of the CIO

Implacable management resistance and divided leadership killed the early New Deal union surge. It died even before the NIRA was ruled unconstitutional in 1935. Failure provoked rebellion within the AFL. Led by John L. Lewis of the United Mine Workers, eight national unions launched a campaign for industrial organization as the Committee for Industrial Organization. After Lewis punched Carpenter’s Union leader William L Hutcheson on the floor of the AFL convention in 1935, the Committee became an independent Congress of Industrial Organization (CIO). Including many Communist activists, CIO committees fanned out to organize workers in steel, automobiles, retail trade, journalism and other industries. Building effectively on local rank and file militancy, including sitdown strikes in automobiles, rubber, and other industries, the CIO quickly won contracts from some of the strongest bastions of the open shop, including United States Steel and General Motors (Zieger, 1995).

The Wagner Act

Creative strategy and energetic organizing helped. But the CIO owed its lasting success to state support. After the failure of the NIRA, New Dealers sought another way to strengthen labor as a force for economic stimulus. This led to the enactment in 1935 of the National Labor Relations Act, also known as the “Wagner Act.” The Wagner Act established a National Labor Relations Board charged to enforce employees’ “right to self-organization, to form, join, or assist labor organizations to bargain collectively through representatives of their own choosing and to engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection.” It provided for elections to choose union representation and required employers to negotiate “in good faith” with their workers’ chosen representatives. Shifting labor conflict from strikes to elections and protecting activists from dismissal for their union work, the Act lowered the cost to individual workers of supporting collective action. It also put the Federal government’s imprimatur on union organization.

Crucial role of rank-and-file militants and state government support

Appointed by President Roosevelt, the first NLRB was openly pro-union, viewing the Act’s preamble as mandate to promote organization. By 1945 the Board had supervised 24,000 union elections involving some 6,000,000 workers, leading to the unionization of nearly 5,000,000 workers. Still, the NLRB was not responsible for the period’s union boom. The Wagner Act had no direct role in the early CIO years because it was ignored for two years until its constitutionality was established by the Supreme Court in National Labor Relations Board v. Jones and Laughlin Steel Company (1937). Furthermore, the election procedure’s gross contribution of 5,000,000 members was less than half of the period’s net union growth of 11,000,000 members. More important than the Wagner Act were crucial union victories over prominent open shop employers in cities like Akron, Ohio, Flint, Michigan, and among Philadelphia-area metal workers. Dedicated rank-and-file militants and effective union leadership were crucial in these victories. As important was the support of pro-New Deal local and state governments. The Roosevelt landslides of 1934 and 1936 brought to office liberal Democratic governors and mayors who gave crucial support to the early CIO. Placing a right to collective bargaining above private property rights, liberal governors and other elected officials in Michigan, Ohio, Pennsylvania and elsewhere refused to send police to evict sit-down strikers who had seized control of factories. This state support allowed the minority of workers who actively supported unionization to use force to overcome the passivity of the majority of workers and the opposition of the employers. The Open Shop of the 1920s was not abandoned; it was overwhelmed by an aggressive, government-backed labor movement (Gall, 1999; Harris, 2000).

World War II

Federal support for union organization was also crucial during World War II. Again, war helped unions both by eliminating unemployment and because state officials supported unions to gain support for the war effort. Established to minimize labor disputes that might disrupt war production, the National War Labor Board instituted a labor truce where unions exchanged a no-strike pledge for employer recognition. During World War II, employers conceded union security and “maintenance of membership” rules requiring workers to pay their union dues. Acquiescing to government demands, employers accepted the institutionalization of the American labor movement, guaranteeing unions a steady flow of dues to fund an expanded bureaucracy, new benefit programs, and even to raise funds for political action. After growing from 3.5 to 10.2 million members between 1935 and 1941, unions added another 4 million members during the war. “Maintenance of membership” rules prevented free riders even more effectively than had the factory takeovers and violence of the late-1930s. With millions of members and money in the bank, labor leaders like Sidney Hillman and Phillip Murray had the ear of business leaders and official Washington. Large, established, and respected: American labor had made it, part of a reformed capitalism committed to both property and prosperity.

Even more than the First World War, World War Two promoted unions and social change. A European civil war, the war divided the continent not only between warring countries but within countries between those, usually on the political right, who favored fascism over liberal parliamentary government and those who defended democracy. Before the war, left and right contended over the appeasement of Nazi Germany and fascist Italy; during the war, many businesses and conservative politicians collaborated with the German occupation against a resistance movement dominated by the left. Throughout Europe, victory over Germany was a triumph for labor that led directly to the entry into government of socialists and Communists.

Successes and Failures after World War II

Union membership exploded during and after the war, nearly doubling between 1938 and 1946. By 1947, unions had enrolled a majority of nonagricultural workers in Scandinavia, Australia, and Italy, and over 40 percent in most other European countries (see Table 1). Accumulated depression and wartime grievances sparked a post- war strike wave that included over 6 million strikers in France in 1948, 4 million in Italy in 1949 and 1950, and 5 million in the United States in 1946. In Europe, popular unrest led to a dramatic political shift to the left. The Labor Party government elected in the United Kingdom in 1945 established a new National Health Service, and nationalized mining, the railroads, and the Bank of England. A center-left post-war coalition government in France expanded the national pension system and nationalized the Bank of France, Renault, and other companies associated with the wartime Vichy regime. Throughout Europe, the share of national income devoted to social services jumped dramatically, as did the share of income going to the working classes.

Europeans unions and the state after World War II

Unions and the political left were stronger everywhere throughout post-war Europe, but in some countries labor’s position deteriorated quickly. In France, Italy, and Japan, the popular front uniting Communists, socialists, and bourgeois liberals dissolved, and labor’s management opponents recovered state support, with the onset of the Cold War. In these countries, union membership dropped after 1947 and unions remained on the defensive for over a decade in a largely adversarial industrial relations system. Elsewhere, notably in countries with weak Communist movements, such as in Scandinavia but also in Austria, Germany, and the Netherlands, labor was able to compel management and state officials to accept strong and centralized labor movements as social partners. In these countries, stable industrial relations allowed cooperation between management and labor to raise productivity and to open new markets for national companies. High-union-density and high-union-centralization allowed Scandinavian and German labor leaders to negotiate incomes policies with governments and employers restraining wage inflation in exchange for stable employment, investment, and wages linked to productivity growth. Such policies could not be instituted in countries with weaker and less centralized labor movements, including France, Italy, Japan, the United Kingdom and the United States because their unions had not been accepted as bargaining partners by management and they lacked the centralized authority to enforce incomes policies and productivity bargains (Alvarez, Garrett, and Lange, 1992).

Europe since the 1960s

Even where European labor was the weakest, in France or Italy in the 1950s, unions were stronger than before World War II. Working with entrenched socialist and labor political parties, European unions were able to maintain high wages, restrictions on managerial autonomy, and social security. The wave of popular unrest in the late 1960s and early 1970s would carry most European unions to new heights, briefly bringing membership to over 50 percent of the labor force in the United Kingdom and in Italy, and bringing socialists into the government in France, Germany, Italy, and the United Kingdom. Since 1980, union membership has declined some and there has been some retrenchment in the welfare state. But the essentials of European welfare states and labor relations have remained (Western, 1997; Golden and Pontusson, 1992).

Unions begin to decline in the US

It was after World War II that American Exceptionalism became most valid, when the United States emerged as the advanced, capitalist democracy with the weakest labor movement. The United States was the only advanced capitalist democracy where unions went into prolonged decline right after World War II. At 35 percent, the unionization rate in 1945 was the highest in American history, but even then it was lower than in most other advanced capitalist economies. It has been falling since. The post-war strike wave, including three million strikers in 1945 and five million in 1946, was the largest in American history but it did little to enhance labor’s political position or bargaining leverage. Instead, it provoked a powerful reaction among employers and others suspicious of growing union power. A concerted drive by the CIO to organize the South, “Operation Dixie,” failed dismally in 1946. Unable to overcome private repression, racial divisions, and the pro-employer stance of southern local and state governments, the CIO’s defeat left the South as a nonunion, low-wage domestic enclave and a bastion of anti- union politics (Griffith, 1988). Then, in 1946, a conservative Republican majority was elected to Congress, dashing hopes for a renewed, post-war New Deal.

The Taft-Hartley Act and the CIO’s Expulsion of Communists

Quickly, labor’s wartime dreams turned to post-war nightmares. The Republican Congress amended the Wagner Act, enacting the Taft-Hartley Act in 1947 to give employers and state officials new powers against strikers and unions. The law also required union leaders to sign a non-Communist affidavit as a condition for union participation in NLRB-sponsored elections. This loyalty oath divided labor during a time of weakness. With its roots in radical politics and an alliance of convenience between Lewis and the Communists, the CIO was torn by the new Red Scare. Hoping to appease the political right, the CIO majority in 1949 expelled ten Communist-led unions with nearly a third of the organization’s members. This marked the end of the CIO’s expansive period. Shorn of its left, the CIO lost its most dynamic and energetic organizers and leaders. Worse, it plunged the CIO into a civil war; non-Communist affiliates raided locals belonging to the “communist-led” unions fatally distracting both sides from the CIO’s original mission to organize the unorganized and empower the dispossessed. By breaking with the Communists, the CIO’s leadership signaled that it had accepted its place within a system of capitalist hierarchy. Little reason remained for the CIO to remain independent. In 1955 it merged with the AFL to form the AFL-CIO.

The Golden Age of American Unions

Without the revolutionary aspirations now associated with the discredited Communists, America’s unions settled down to bargain over wages and working conditions without challenging such managerial prerogatives as decisions about prices, production, and investment. Some labor leaders, notably James Hoffa of the Teamsters but also local leaders in construction and service trades, abandoned all higher aspirations to use their unions for purely personal financial gain. Allying themselves with organized crime, they used violence to maintain their power over employers and their own rank-and-file membership. Others, including former-CIO leaders, like Walter Reuther of the United Auto Workers, continued to push the envelope of legitimate bargaining topics, building challenges to capitalist authority at the workplace. But even the UAW was unable to force major managerial prerogatives onto the bargaining table.

The quarter century after 1950 formed a ‘golden age’ for American unions. Established unions found a secure place at the bargaining table with America’s leading firms in such industries as autos, steel, trucking, and chemicals. Contracts were periodically negotiated providing for the exchange of good wages for cooperative workplace relations. Rules were negotiated providing a system of civil authority at work, with negotiated regulations for promotion and layoffs, and procedures giving workers opportunities to voice grievances before neutral arbitrators. Wages rose steadily, by over 2 percent per year and union workers earned a comfortable 20 percent more than nonunion workers of similar age, experience and education. Wages grew faster in Europe but American wages were higher and growth was rapid enough to narrow the gap between rich and poor, and between management salaries and worker wages. Unions also won a growing list of benefit programs, medical and dental insurance, paid holidays and vacations, supplemental unemployment insurance, and pensions. Competition for workers forced many nonunion employers to match the benefit packages won by unions, but unionized employers provided benefits worth over 60 percent more than were given nonunion workers (Freeman and Medoff, 1984; Hirsch and Addison, 1986).

Impact of decentralized bargaining in the US

In most of Europe, strong labor movements limit the wage and benefit advantages of union membership by forcing governments to extend union gains to all workers in an industry regardless of union status. By compelling nonunion employers to match union gains, this limited the competitive penalty borne by unionized firms. By contrast, decentralized bargaining and weak unions in the United States created large union wage differentials that put unionized firms at a competitive disadvantage, encouraging them to seek out nonunion labor and localities. A stable and vocal workforce with more experience and training did raise unionized firms’ labor productivity by 15 percent or more above the level of nonunion firms and some scholars have argued that unionized workers earn much of their wage gain. Others, however, find little productivity gain for unionized workers after account is taken of greater use of machinery and other nonlabor inputs by unionized firms (compare Freeman and Medoff, 1984 and Hirsch and Addison, 1986). But even unionized firms with higher labor productivity were usually more conscious of the wages and benefits paid to union worker than they were of unionization’s productivity benefits.

Unions and the Civil Rights Movement

Post-war unions remained politically active. European unions were closely associated with political parties, Communists in France and Italy, socialists or labor parties elsewhere. In practice, notwithstanding revolutionary pronouncements, even the Communist’s political agenda came to resemble that of unions in the United States, liberal reform including a commitment to full employment and the redistribution of income towards workers and the poor (Boyle, 1998). Golden age unions have also been at the forefront of campaigns to extend individual rights. The major domestic political issue of the post-war United States, civil rights, was troubling for many unions because of the racist provisions in their own practice. Nonetheless, in the 1950s and 1960s, the AFL-CIO strongly supported the civil rights movement, funded civil rights organizations and lobbied in support of civil rights legislation. The AFL-CIO pushed unions to open their ranks to African-American workers, even at the expense of losing affiliates in states like Mississippi. Seizing the opportunity created by the civil rights movement, some unions gained members among nonwhites. The feminist movement of the 1970s created new challenges for the masculine and sometimes misogynist labor movement. But, here too, the search for members and a desire to remove sources of division eventually brought organized labor to the forefront. The AFL-CIO supported the Equal Rights Amendment and began to promote women to leadership positions.

Shift of unions to the public sector

In no other country have women and members of racial minorities assumed such prominent positions in the labor movement as they have in the United States. The movement of African-American and women to leadership positions in the late-twentieth century labor movement was accelerated by a shift in the membership structure of the United States union movement. Maintaining their strength in traditional, masculine occupations in manufacturing, construction, mining, and transportation, European unions remained predominantly male. Union decline in these industries combined with growth in heavily female public sector employments in the United States led to the femininization of the American labor movement. Union membership began to decline in the private sector in the United States immediately after World War II. Between 1953 and 1983, for example, the unionization rate fell from 42 percent to 28 percent in manufacturing, by nearly half in transportation, and by over half in construction and mining (see Table 4). By contrast, after 1960, public sector workers won new opportunities to form unions. Because women and racial minorities form a disproportionate share of these public sector workers, increasing union membership there has changed the American labor movement’s racial and gender composition. Women comprised only 19 percent of American union members in the mid-1950s but their share rose to 40 percent by the late 1990s. By then, the most unionized workers were no longer the white male skilled craftsmen of old. Instead, they were nurses, parole officers, government clerks, and most of all, school teachers.

Union Collapse and Union Avoidance in the US

Outside the United States, unions grew through the 1970s and, despite some decline since the 1980s, European and Canadian unions remain large and powerful. The United States is different. Union decline since World War II has brought the United States private-sector labor movement down to early twentieth century levels. As a share of the nonagricultural labor force, union membership fell from its 1945 peak of 35 percent down to under 30 percent in the early 1970s. From there, decline became a general rout. In the 1970s, rising unemployment, increasing international competition, and the movement of industry to the nonunion South and to rural areas undermined the bargaining position of many American unions leaving them vulnerable to a renewed management offensive. Returning to pre-New Deal practices, some employers established new welfare and employee representation programs, hoping to lure worker away from unions (Heckscher, 1987; Jacoby, 1997). Others returned to pre-New Deal repression. By the early 1980s, union avoidance had become an industry. Anti-union consultants and lawyers openly counseled employers how to use labor law to evade unions. Findings of employers’ unfair labor practices in violation of the Wagner Act tripled in the 1970s; by the 1980s, the NLRB reinstated over 10,000 workers a year who were illegally discharged for union activity, nearly one for every twenty who voted for a union in an NLRB election (Weiler, 1983). By the 1990s, the unionization rate in the United States fell to under 14 percent, including only 9 percent of the private sector workers and 37 percent of those in the public sector. Unions now have minimal impact on wages or working conditions for most American workers.

Nowhere else have unions collapsed as in the United States. With a unionization rate dramatically below that of other countries, including Canada, the United States has achieved exceptional status (see Table 7). There remains great interest in unions among American workers; where employers do not resist, unions thrive. In the public sector and in some private employers where workers have free choice to join a union, they are as likely as they ever were, and as likely as workers anywhere. In the past, as after 1886 and in the 1920s, when American employers broke unions, they revived when a government committed to workplace democracy sheltered them from employer repression. If we see another such government, we may yet see another union revival.

Table 7
Union Membership Rates for the United States and Six Other Leading Industrial Economies, 1970 to 1990

1970 1980 1990
U.S.: Unionization Rate: All industries 30.0 24.7 17.6
U.S.: Unionization Rate: Manufacturing 41.0 35.0 22.0
U.S.: Unionization Rate: Financial services 5.0 4.0 2.0
Six Countries: Unionization Rate: All industries 37.1 39.7 35.3
Six Countries: Unionization Rate: Manufacturing 38.8 44.0 35.2
Five Countries: Unionization Rate: Financial services 23.9 23.8 24.0
Ratio: U.S./Six Countries: All industries 0.808 0.622 0.499
Ratio: U.S./Six Countries: Manufacturing 1.058 0.795 0.626
Ratio: U.S./Five Countries: Financial services 0.209 0.168 0.083

Note: The unionization rate reported is the number of union members out of 100 workers in the specified industry. The ratio shown is the unionization rate for the United States divided by the unionization rate for the other countries. The six countries are Canada, France, Germany, Italy, Japan, and the United Kingdom. Data on union membership in financial services in France are not available.

Source: Visser (1991): 110.

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The History of American Labor Market Institutions and Outcomes

Joshua Rosenbloom, University of Kansas

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

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

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

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

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

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

The Geographic Distribution of Labor

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

Trans-Atlantic Migration in the Colonial Period

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

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

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

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

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

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

Table 1

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

Total Emigration
Destination Number Percentage Percent listed as servants
New England 54 1.20 1.85
Middle Colonies 1,162 25.78 61.27
New York 303 6.72 11.55
Pennsylvania 859 19.06 78.81
Chesapeake 2,984 66.21 96.28
Maryland 2,217 49.19 98.33
Virginia 767 17.02 90.35
Lower South 307 6.81 19.54
Carolinas 106 2.35 23.58
Georgia 196 4.35 17.86
Florida 5 0.11 0.00
Total 4,507 80.90

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

International Migration in the Nineteenth and Twentieth Centuries

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

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

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

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

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

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

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

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

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

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

Internal Migration in the Nineteenth and Twentieth Centuries

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

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

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

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

The Distribution of Labor among Economic Activities

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

Table 2

Sectoral Distribution of the Labor Force, 1800-1999

Share in
Non-Agriculture
Year Total Labor Force (1000s) Agriculture Total Manufacturing Services
1800 1,658 76.2 23.8
1850 8,199 53.6 46.4
1900 29,031 37.5 59.4 35.8 23.6
1950 57,860 11.9 88.1 41.0 47.1
1999 133,489 2.3 97.7 24.7 73.0

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

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

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

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

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

The Agricultural Labor Market

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

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

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

The Emergence of Internal Labor Markets

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

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

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

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

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

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

The Government and the Labor Market

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

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

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

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

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

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

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

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

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

The Changing Boundaries of the Labor Market

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

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

Assessing the Efficiency of Labor Market Institutions

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

Long-Run Efficiency and Wage Gaps

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

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

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

Figure 1

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

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

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

Figure 2

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

(Northeast = 100 in each year)

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

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

Table 3

Net Migration by Region, and Race, 1870-1950

South Northeast North Central West
Period White Black White Black White Black White Black
Number (in 1,000s)
1870-80 91 -68 -374 26 26 42 257 0
1880-90 -271 -88 -240 61 -43 28 554 0
1890-00 -30 -185 101 136 -445 49 374 0
1900-10 -69 -194 -196 109 -1,110 63 1,375 22
1910-20 -663 -555 -74 242 -145 281 880 32
1920-30 -704 -903 -177 435 -464 426 1,345 42
1930-40 -558 -480 55 273 -747 152 1,250 55
1940-50 -866 -1581 -659 599 -1,296 626 2,822 356
Rate (migrants/1,000 Population)
1870-80 11 -14 -33 55 2 124 274 0
1880-90 -26 -15 -18 107 -3 65 325 0
1890-00 -2 -26 6 200 -23 104 141 0
1900-10 -4 -24 -11 137 -48 122 329 542
1910-20 -33 -66 -3 254 -5 421 143 491
1920-30 -30 -103 -7 328 -15 415 160 421
1930-40 -20 -52 2 157 -22 113 116 378
1940-50 -28 -167 -20 259 -35 344 195 964

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

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

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

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

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

Table 4

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

Date Black Relative Wage
1940 43.4
1950 55.2
1960 57.5
1970 64.4
1980 72.6
1990 70.0
2004 77.0

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

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

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

The Response to Short-run Macroeconomic Fluctuations

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

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

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

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

Wage Determination and Distributional Issues

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

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

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

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

Conclusions

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

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

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

Economic History of Hong Kong

Catherine R. Schenk, University of Glasgow

Hong Kong’s economic and political history has been primarily determined by its geographical location. The territory of Hong Kong is comprised of two main islands (Hong Kong Island and Lantau Island) and a mainland hinterland. It thus forms a natural geographic port for Guangdong province in Southeast China. In a sense, there is considerable continuity in Hong Kong’s position in the international economy since its origins were as a commercial entrepot for China’s regional and global trade, and this is still a role it plays today. From a relatively unpopulated territory at the beginning of the nineteenth century, Hong Kong grew to become one of the most important international financial centers in the world. Hong Kong also underwent a rapid and successful process of industrialization from the 1950s that captured the imagination of economists and historians in the 1980s and 1990s.

Hong Kong from 1842 to 1949

After being ceded by China to the British under the Treaty of Nanking in 1842, the colony of Hong Kong quickly became a regional center for financial and commercial services based particularly around the Hongkong and Shanghai Bank and merchant companies such as Jardine Matheson. In 1841 there were only 7500 Chinese inhabitants of Hong Kong and a handful of foreigners, but by 1859 the Chinese community was over 85,000 supplemented by about 1600 foreigners. The economy was closely linked to commercial activity, dominated by shipping, banking and merchant companies. Gradually there was increasing diversification to services and retail outlets to meet the needs of the local population, and also shipbuilding and maintenance linked to the presence of the British naval and merchant shipping. There was some industrial expansion in the nineteenth century; notably sugar refining, cement and ice factories among the foreign sector, alongside smaller-scale local workshop manufactures. The mainland territory of Hong Kong was ceded to British rule by two further treaties in this period; Kowloon in 1860 and the New Territories in 1898.

Hong Kong was profoundly affected by the disastrous events in Mainland China in the inter-war period. After overthrow of the dynastic system in 1911, the Kuomintang (KMT) took a decade to pull together a republican nation-state. The Great Depression and fluctuations in the international price of silver then disrupted China’s economic relations with the rest of the world in the 1930s. From 1937, China descended into the Sino-Japanese War. Two years after the end of World War II, the civil war between the KMT and Chinese Communist Party pushed China into a downward economic spiral. During this period, Hong Kong suffered from the slowdown in world trade and in China’s trade in particular. However, problems on the mainland also diverted business and entrepreneurs from Shanghai and other cities to the relative safety and stability of the British colonial port of Hong Kong.

Post-War Industrialization

After the establishment of the People’s Republic of China (PRC) in 1949, the mainland began a process of isolation from the international economy, partly for ideological reasons and partly because of Cold War embargos on trade imposed first by the United States in 1949 and then by the United Nations in 1951. Nevertheless, Hong Kong was vital to the international economic links that the PRC continued in order to pursue industrialization and support grain imports. Even during the period of self-sufficiency in the 1960s, Hong Kong’s imports of food and water from the PRC were a vital source of foreign exchange revenue that ensured Hong Kong’s usefulness to the mainland. In turn, cheap food helped to restrain rises in the cost of living in Hong Kong thus helping to keep wages low during the period of labor-intensive industrialization.

The industrialization of Hong Kong is usually dated from the embargoes of the 1950s. Certainly, Hong Kong’s prosperity could no longer depend on the China trade in this decade. However, as seen above, industry emerged in the nineteenth century and it began to expand in the interwar period. Nevertheless, industrialization accelerated after 1945 with the inflow of refugees, entrepreneurs and capital fleeing the civil war on the mainland. The most prominent example is immigrants from Shanghai who created the cotton spinning industry in the colony. Hong Kong’s industry was founded in the textile sector in the 1950s before gradually diversifying in the 1960s to clothing, electronics, plastics and other labor-intensive production mainly for export.

The economic development of Hong Kong is unusual in a variety of respects. First, industrialization was accompanied by increasing numbers of small and medium-sized enterprises (SME) rather than consolidation. In 1955, 91 percent of manufacturing establishments employed fewer than one hundred workers, a proportion that increased to 96.5 percent by 1975. Factories employing fewer than one hundred workers accounted for 42 percent of Hong Kong’s domestic exports to the U.K. in 1968, amounting to HK$1.2 billion. At the end of 2002, SMEs still amounted to 98 percent of enterprises, providing 60 percent of total private employment.

Second, until the late 1960s, the government did not engage in active industrial planning. This was partly because the government was preoccupied with social spending on housing large flows of immigrants, and partly because of an ideological sympathy for free market forces. This means that Hong Kong fits outside the usual models of Asian economic development based on state-led industrialization (Japan, South Korea, Singapore, Taiwan) or domination of foreign firms (Singapore) or large firms with close relations to the state (Japan, South Korea). Low taxes, lax employment laws, absence of government debt, and free trade are all pillars of the Hong Kong experience of economic development.

In fact, of course, the reality was very different from the myth of complete laissez-faire. The government’s programs of public housing, land reclamation, and infrastructure investment were ambitious. New industrial towns were built to house immigrants, provide employment and aid industry. The government subsidized industry indirectly through this public housing, which restrained rises in the cost of living that would have threatened Hong Kong’s labor-cost advantage in manufacturing. The government also pursued an ambitious public education program, creating over 300,000 new primary school places between 1954 and 1961. By 1966, 99.8% of school-age children were attending primary school, although free universal primary school was not provided until 1971. Secondary school provision was expanded in the 1970s, and from 1978 the government offered compulsory free education for all children up to the age of 15. The hand of government was much lighter on international trade and finance. Exchange controls were limited to a few imposed by the U.K., and there were no controls on international flows of capital. Government expenditure even fell from 7.5% of GDP in the 1960s to 6.5% in the 1970s. In the same decades, British government spending as a percent of GDP rose from 17% to 20%.

From the mid-1950s Hong Kong’s rapid success as a textile and garment exporter generated trade friction that resulted in voluntary export restraints in a series of treaties with the U.K. beginning in 1959. Despite these agreements, Hong Kong’s exporters continued to exploit their flexibility and adaptability to increase production and find new markets. Indeed, exports increased from 54% of GDP in the 1960s to 64% in the 1970s. Figure 1 shows the annual changes in the growth of real GDP per capita. In the period from 1962 until the onset of the oil crisis in 1973, the average growth rate was 6.5% per year. From 1976 to 1996 GDP grew at an average of 5.6% per year. There were negative shocks in 1967-68 as a result of local disturbances from the onset of the Cultural Revolution in the PRC, and again in 1973 to 1975 from the global oil crisis. In the early 1980s there was another negative shock related to politics, as the terms of Hong Kong’s return to PRC control in 1997 were formalized.

 Annual percentage change of per capita GDP 1962-2001

Reintegration with China, 1978-1997

The Open Door Policy of the PRC announced by Deng Xiao-ping at the end of 1978 marked a new era for Hong Kong’s economy. With the newly vigorous engagement of China in international trade and investment, Hong Kong’s integration with the mainland accelerated as it regained its traditional role as that country’s main provider of commercial and financial services. From 1978 to 1997, visible trade between Hong Kong and the PRC grew at an average rate of 28% per annum. At the same time, Hong Kong firms began to move their labor-intensive activities to the mainland to take advantage of cheaper labor. The integration of Hong Kong with the Pearl River delta in Guangdong is the most striking aspect of these trade and investment links. At the end of 1997, the cumulative value of Hong Kong’s direct investment in Guangdong was estimated at US$48 billion, accounting for almost 80% of the total foreign direct investment there. Hong Kong companies and joint ventures in Guangdong province employed about five million people. Most of these businesses were labor-intensive assembly for export, but from 1997 onward there has been increased investment in financial services, tourism and retail trade.

While manufacturing was moved out of the colony during the 1980s and 1990s, there was a surge in the service sector. This transformation of the structure of Hong Kong’s economy from manufacturing to services was dramatic. Most remarkably it was accomplished without faltering growth rates overall, and with an average unemployment rate of only 2.5% from 1982 to 1997. Figure 2 shows that the value of manufacturing peaked in 1992 before beginning an absolute decline. In contrast, the value of commercial and financial services soared. This is reflected in the contribution of services and manufacturing to GDP shown in Figure 3. Employment in the service sector rose from 52% to 80% of the labor force from 1981 to 2000 while manufacturing employment fell from 39% to 10% in the same period.

 GDP by economic activity at current prices  Contribution to Hong Kong's GDP at factor prices

Asian Financial Crisis, 1997-2002

The terms for the return of Hong Kong to Chinese rule in July 1997 carefully protected the territory’s separate economic characteristics, which have been so beneficial to the Chinese economy. Under the Basic Law, a “one country-two systems” policy was formulated which left Hong Kong monetarily and economically separate from the mainland with exchange and trade controls remaining in place as well as restrictions on the movement of people. Hong Kong was hit hard by the Asian Financial Crisis that struck the region in mid-1997, just at the time of the handover of the colony back to Chinese administrative control. The crisis prompted a collapse in share prices and the property market that affected the ability of many borrowers to repay bank loans. Unlike most Asian countries, Hong Kong Special Administrative Region and mainland China maintained their currencies’ exchange rates with the U.S. dollar rather than devaluing. Along with the Sudden Acute Respiratory Syndrome (SARS) threat in 2002, the Asian Financial Crisis pushed Hong Kong into a new era of recession with a rise in unemployment (6% on average from 1998-2003) and absolute declines in output and prices. The longer-term impact of the crisis has been to increase the intensity and importance of Hong Kong’s trade and investment links with the PRC. Since the PRC did not fare as badly from the regional crisis, the economic prospects for Hong Kong have been tied more closely to the increasingly prosperous mainland.

Suggestions for Further Reading

For a general history of Hong Kong from the nineteenth century, see S. Tsang, A Modern History of Hong Kong, London: IB Tauris, 2004. For accounts of Hong Kong’s economic history see, D.R. Meyer, Hong Kong as a Global Metropolis, Cambridge: Cambridge University Press, 2000; C.R. Schenk, Hong Kong as an International Financial Centre: Emergence and Development, 1945-65, London: Routledge, 2001; and Y-P Ho, Trade, Industrial Restructuring and Development in Hong Kong, London: Macmillan, 1992. Useful statistics and summaries of recent developments are available on the website of the Hong Kong Monetary Authority www.info.gov.hk/hkma.

Citation: Schenk, Catherine. “Economic History of Hong Kong”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/economic-history-of-hong-kong/

Manufactured and Natural Gas Industry

Christopher Castaneda, California State University – Sacramento

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

Manufactured Gas

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

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

Rembrandt Peale in Baltimore

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

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

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

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

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

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

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

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

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

Challenge from Electric Lighting and Consolidation

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

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

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

Natural Gas

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

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

1920s: Development of Southwestern Fields

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

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

Pipeline Advances

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

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

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

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

Samuel Insull

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

Federal Regulation

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

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

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

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

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

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

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

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

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

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

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

The Future

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

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

References:

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

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

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

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

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

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

Fair Housing Laws

William J. Collins, Vanderbilt University

Before the Civil Rights Movement, housing market discrimination was common and blatant, especially against African Americans but also against Jews and other minority groups.1 This essay focuses on the treatment of African Americans, but readers should keep in the mind the pervasiveness of housing discrimination around 1950. By “discrimination,” I mean (as usual in economics) the differential treatment of market participants on the basis of their race or ethnicity — for example, the refusal to rent an apartment to a black family that is willing and able to pay a rental price that would be acceptable if the family were white. Proponents of fair housing laws, at the local, state, and federal levels, hoped that the laws would effectively limit housing market discrimination.

Around mid-century, many barriers inhibited African Americans’ residential mobility, including racially restrictive covenants among white property owners, biased lending practices of banks and government institutions, strong social norms against selling or renting property to blacks outside established black neighborhoods, and harassment of blacks seeking residence in otherwise white neighborhoods (Myrdal 1944, Abrams 1955, Meyer 2000). Since then, the potentially adverse effects of housing discrimination on blacks’ accumulation of wealth through housing equity and on blacks’ access to high quality schools, jobs, and public goods have been widely discussed (Kain 1968, Oliver and Shapiro 1995, Yinger 2001). A related literature has sought to understand the apparent connection between residential segregation, in part a legacy of housing market discrimination (Kain and Quigley 1975), and a variety of adverse socioeconomic outcomes (Massey and Denton 1993, Cutler and Glaeser 1997, Collins and Margo 2000).

Given these concerns, it is not surprising that dismantling housing market discrimination has been among the top priorities of civil rights groups and urban policymakers for decades. Starting in 1959, states began implementing fair housing laws to curb discriminatory practices by sellers, renters, real estate agents, builders, and lenders. In 1968, almost immediately after the murder of Martin Luther King Jr., the United States Congress passed the Fair Housing Act. The Fair Housing Amendments Act of 1988 substantially broadened federal enforcement powers (Yinger 1999).

Fair housing laws are commonly placed among the Civil Rights Movement’s central legislative achievements. Unfortunately, we still do not have convincing measures of the laws’ impact on blacks’ housing market outcomes. It is clear that the laws did not completely eliminate discriminatory practices, let alone the residential patterns that such practices had promoted. The more relevant open questions concern how much headway the laws made on discriminatory practices and segregation, and especially, whether minority families improved their housing situation because of the laws’ implementation. On the basis of the existing evidence, it would be difficult to argue that the laws made a large direct contribution to improvements in African Americans’ housing market outcomes (or those of other groups protected by the laws). One could argue, however, that fair housing was one element of a larger campaign that successfully changed discriminatory norms and policies.

Fair Housing’s Origins and Operation

The federal Fair Housing Act of 1968 remains a highly visible accomplishment of the Civil Rights Movement. It is important to note, however, that the basic ideas that underpinned the federal legislation emerged long before 1968. State and local governments incrementally adopted nondiscriminatory standards for public housing starting in the late 1930s. The application of anti-discrimination policy to the private housing market, however, was among the Civil Rights Movement’s least popular initiatives among whites, and as a result, fair housing legislation lagged years behind fair-employment and public accommodations laws (Lockard 1968). On one level, this reflected whites’ concern about property values and their desire to avoid interracial social contact. On another level, it reflected the rhetorical strength of the argument that the government ought not infringe on perceived private property rights, particularly with respect to homes.

Nevertheless, as black migration to central-city neighborhoods continued through the 1950s, and as the Civil Rights Movement gained momentum, fair housing initiatives rose toward the top of the Movement’s legislative agenda. In this regard, especially when considering state legislation outside the South, it is important to note that the efforts of African-American groups were complemented by those of Jewish groups and labor unions (Lockard 1968, Collins 2004b). In 1957, New York City adopted the nation’s first fair housing ordinance which served as a model for several of the subsequent state laws and was itself based on existing fair-employment statutes. While granting exceptions for the rental of rooms in or attached to owner-occupied homes (the “Mrs. Murphy rule”), the ordinance (as amended in 1962) stated that:

“no owner, . . . real estate broker, . . . or other person having the right to sell, rent, lease, . . . or otherwise dispose of a housing accommodation . . . shall refuse to sell, rent, lease . . . or otherwise deny or withhold from any person or group of persons such housing accommodations, or represent that such housing accommodations are not available for inspection, when in fact they are so available, because of the race, color, religion, national origin or ancestry of such persons” (Housing and Home Finance Agency 1964, p. 287). It also barred discrimination in the terms of sale or rental, advertisements expressing discriminatory preferences, and discrimination by banks and lending institutions. Finally, it outlined a procedure for handling complaints and enforcing the policy.

The state fair housing statutes initially had varying degrees of coverage. Almost all states included a Mrs. Murphy rule. More importantly, some states also exempted activities surrounding the sale or rental of owner-occupied single-family homes. Others allowed the owner-occupiers of homes to discriminate while simultaneously prohibiting discriminatory acts by real-estate brokers, advertisers, lenders, and builders. By 1968, several states had converged to a standard that covered virtually all sales and rentals (except those by Mrs. Murphy). In general, these state laws contained stronger enforcement mechanisms than the federal legislation passed in that year.

Following procedures established to enforce the earlier fair-employment laws, the administrative agencies charged with enforcing the fair housing laws did so, for the most part, by responding to individual complaints rather than by seeking out discriminatory practices. When presented with a viable complaint (i.e., within the law’s coverage), the agency would conduct an investigation. If evidence of discrimination was found, the agency’s representatives would attempt to persuade the discriminatory party to comply with the law. If the discriminatory party refused to cooperate, a public hearing could be held, a cease and desist order and/or fine could be issued, court proceedings could be undertaken, and (if appropriate) a real estate agent’s license could be suspended. Of course, all of this would take time, and households attempting to move might not have been willing or able to wait for redress. Beyond their enforcement role, fair housing agencies often undertook broad educational campaigns and offered advice to community leaders and housing industry participants regarding residential integration.

The effectiveness of this approach in dealing with housing market discrimination or, more to the point, in improving blacks’ housing market outcomes, is unclear a priori. The anti-discrimination measures were weak in the sense that the agencies’ first step was always to seek “conciliation” rather than punishment. Thus, even if caught, there was no immediate penalty and perhaps little incentive to adjust discriminatory policies until confronted by the agency. Even so, the passage of the laws and the threat of sanctions against resistant builders, lenders, or real estate agents might have facilitated conciliation procedures once initiated, might have modified discriminatory behavior immediately (rendering complaints unnecessary), and might have provided a convenient excuse for those who wished to do business with blacks but felt constrained by community norms. Moreover, the speed with which some neighborhoods “tipped” from white to black might have amplified the effects from enforcement efforts. Finally, it is possible that the state agency’s educational campaigns contributed to changing discriminatory norms. Whether the fair housing laws actually contributed to the observed improvement in blacks’ housing market outcomes is discussed below.

In 1966 and 1967, Congress failed to enact federal fair housing legislation, and its doing so in 1968 surprised many observers (Congressional Quarterly Almanac 1968). Southern opposition to the law was strong, and therefore, attaining cloture on a filibuster in the Senate (then requiring a 2/3 majority of votes) was a key step in moving the legislation forward. The Senate finally passed the bill on March 11, 1968; the House passed the bill on April 10 despite opposition mobilized by the National Association of Real Estate Boards. All of this occurred against a background of extraordinary urban civil disturbances from the mid to late 1960s, including an outburst after Martin Luther King’s assassination on April 4.

The federal Fair Housing Act of 1968 initially exempted privately owned, single-family housing. The policy’s coverage was extended over the next two years, but the Department of Housing and Urban Development’s (HUD) enforcement powers remained severely circumscribed (Yinger 1999). The legislation allowed only informal, clandestine efforts at persuasion. If persuasion failed, the complainant was then free to sue for an injunction in federal court, but this was obviously cumbersome, costly, and time consuming. The federal law also specified that a state with its own fair housing law had initial jurisdiction over any complaints originating there. Thus, the original federal law was no stronger than, and in many instances weaker than, existing state legislation.

Fair Housing’s Impact and Extension

Since 1960, blacks’ average housing market outcomes have improved relative to whites’, at least according to broad and commonly referenced measures such as home ownership rates and property values. Moreover, in the 1960s middle- and upper-class black families moved to suburban neighborhoods in larger numbers than ever before, and the average level of residential segregation within cities began to decline around 1970 (Cutler, Glaeser, and Vigdor 1999). These developments are consistent with the presence of a significant fair housing policy effect, but they are far from a direct evaluation of the hypothesis that fair housing laws helped improve blacks’ housing market outcomes.

How could the fair housing laws have contributed to improvement in blacks’ housing outcomes? The laws were intended to lower barriers to blacks’ entry into predominantly white neighborhoods and new housing developments, and to curb discriminatory treatment of blacks seeking mortgages, thereby lowering the effective cost of housing and expanding minorities’ set of housing opportunities. If this mechanism worked as intended, one would expect blacks to increase their housing consumption relative to whites, all other things being equal. One might also expect to see more racial integration in neighborhoods, though in theory, this need not follow. Of course, given that the laws’ enforcement mechanisms were far from draconian and that discriminatory biases in housing markets were deeply rooted, it is possible that the laws had no detectable effect whatsoever.

Comparing similar states that happened to have different fair housing policies before federal legislation was passed, Collins (2004a) finds little statistical evidence to support the hypothesis that state-level fair housing laws made an economically significant contribution to African-Americans’ housing market outcomes in the 1960s. Others (e.g., Yinger 1998) have suggested that a substantial degree of housing market discrimination still exists, though almost certainly less than before the passage of fair housing laws. The difficult measurement problem is figuring out how much of the perceived decline in discrimination or improvement in blacks’ housing is attributable to the anti-discrimination laws and how much is attributable to more general changes in discriminatory sentiment and in the economic resources of African Americans.

Since 1968, the federal government has made several extensions to its original fair housing policy. Among the most important are Fair Housing Assistance Program (1984), the Fair Housing Initiatives Program (1986), and amendments to the Fair Housing Act (1988). Separate but relevant legislation that may have had implications for minority home ownership includes the Home Mortgage Disclosure Act (1975, amended in 1989) and the Community Reinvestment Act (1977). Readers are referred to Galster (1999) and Yinger (1999) for further discussion of fair housing policy in contemporary housing markets.

References

Abrams, Charles. Forbidden Neighbors: A Study of Prejudice in Housing. New York: Harper & Brothers, 1955.

Collins, William J. “The Housing Market Impact of State-Level Anti-Discrimination Laws, 1960-1970.” Journal of Urban Economics 55, no. 3 (2004a): 534-564.

Collins, William J. “The Political Economy of Fair Housing Laws, 1950-1968.” Cambridge, MA: NBER Working Paper 10610 (2004b), available at http://www.nber.org/papers/w10610.

Collins, Willam J. and Robert A. Margo. “When Did Ghettos Go Bad? Residential Segregation and Socioeconomic Outcomes.” Economics Letters 69 (2000): 239-243.

Congressional Quarterly Almanac. “Congress Enacts Open Housing Legislation.” CQ Almanac 1968. Washington, DC: Congressional Quarterly News Features (1968): 152-168.

Cutler, David M. and Edward L. Glaeser. “Are Ghettos Good or Bad?” Quarterly Journal of Economics 112 (1997): 827-872.

Cutler, David M, Edward L. Glaeser, and Jacob L. Vigdor. “The Rise and Decline of the American Ghetto.” Journal of Political Economy 107 (1999): 455-506.

Galster, George C. “The Evolving Challenges of Fair Housing since 1968: Open Housing, Integration, and the Reduction of Ghettoization.” Cityscape 4 (1999): 123-138.

Housing and Home Finance Agency. Fair Housing Laws: Summaries and Text of State and Municipal Laws. Washington, DC: Government Printing Office, 1964.

Kain, John F. “Housing Segregation, Negro Employment, and Metropolitan Decentralization.” Quarterly Journal of Economics 82 (1968): 175-197.

Kain, John F. and John M. Quigley, Housing Markets and Racial Discrimination: A Microeconomic Analysis. New York: Columbia University Press, 1975.

Lockard, Duane. Toward Equal Opportunity: A Study of State and Local Antidiscrimination Laws. New York: Macmillan Company, 1968.

Massey, Douglas S. and Nancy A. Denton. American Apartheid: Segregation and the Making of the Underclass. Cambridge, MA: Harvard University Press, 1993.

Meyer, Stephen G. As Long As They Don’t Move Next Door: Segregation and Racial Conflict in American Neighborhoods. New York: Rowman & Littlefield, 2000.

Myrdal, Gunnar. An American Dilemma: The Negro Problem and Modern Democracy. New York: Harper & Row, 1962 (originally 1944).

Oliver, Melvin L. and Thomas M. Shapiro. Black Wealth/White Wealth: A New Perspective on Racial Inequality. New York: Routledge, 1995.

Yinger, John. “Housing Discrimination and Residential Segregation as Causes of Poverty.” In Understanding Poverty, edited by S.H. Danziger and R.H. Haveman, 359-391. Cambridge, MA: Harvard University Press, 2001.

Yinger, John. “Sustaining the Fair Housing Act.” Cityscape 4 (1999): 93-105.

Yinger, John. “Evidence on Discrimination in Consumer Markets.” Journal of Economic Perspectives 12 (1998): 23-40.

1This essay draws heavily on Collins 2004a and 2004b.

Citation: Collins, William. “Fair Housing Laws”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2008. URL http://eh.net/encyclopedia/fair-housing-laws/