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Regulating Railroad Innovation: Business, Technology, and Politics in America, 1840-1920

Author(s):Usselman, Steven W.
Reviewer(s):Schramm, Jeff

Published by EH.NET (September 2004)

Steven W. Usselman, Regulating Railroad Innovation: Business, Technology, and Politics in America, 1840-1920. New York: Cambridge University Press, 2002. xv + 398 pp. $70 (hardback), ISBN: 0-521-80636-4; $29.95 (paperback), ISBN: 0-521-00106-4.

Reviewed for EH.NET by Jeff Schramm, Department of History and Political Science, University of Missouri — Rolla.

The railroad was the quintessential industrial technology. It has also been the subject of much economic and historical analysis since the days of the Vanderbilts and Jay Gould. While one would think that there was little new to be gained from an exhaustive look at railroads during their height of influence, this book clearly and definitively negates such an assertion. The railroad, America’s first big business, had a need to remain on the cutting edge technologically but also to order and channel those technological innovations to productive ends. The inherent tension between new innovations and existing management and business structures is one of the themes at the heart of the book. It is more than just a look inside the board room, engineering, and accounting departments, however. Railroads, while private businesses, were in the public eye in a way that few other industries were, certainly at the time. Politics, therefore, was also a constant concern. Usselman, an associate professor of History at Georgia Institute of Technology, opens the black box and takes a long look at the process and players involved in railroad innovation. He asserts that railroading during the period of study, “opens a uniquely revealing window into the dynamics not just of technical change but of American history” (p. 4). He clearly wants to tie technological history to the larger stream of American history and even to draw lessons from past attempts to regulate technology to our current efforts.

After a brief introduction stating the above objectives, Ussleman divides his work into three parts. The first is titled Assembling the Machine, 1840-1876, and itself is composed of three chapters. In this section he deals with the initial growth and development of the railroad system, broadly conceived. Railroads were more than just transportation for people and goods. Usselman correctly states that they were seen as transformative enterprises and, therefore, in the public eye from the beginning. This public inspection manifested itself in various ways, from an advantageous legal environment to land grants and other perks. Competition between railroads was less than expected as they were all engaged in the extraction of resources from a seemingly limitless and virgin land. As might be expected during this phase, railroads tried many ways to manage technological change, some more successful than others. Patent disputes were the major source of friction during this period.

The second part is titled Running the Machine, 1876-1904, and is composed of four chapters. With the initial expansion into untapped territory essentially over and with increasing inter line competition, railroads sought to refocus from expansion to efficiency. The public was increasingly turned off by the control that some railroads had over transportation of goods. This concern began to influence policy as the government became less accommodating and began to threaten increasing regulation. To respond to these challenges, railroads settled into a “middle age” where they increasingly turned to professionals for management and engineering expertise. Many railroads, most notably the Pennsylvania, enshrined these specialists in their own, in house, research and development facilities. Other roads embraced industry-wide trade associations, professional organizations, and engineering conferences to set standards and mediate technological development. Railroads also consciously chose not to be all things to all people but to concentrate their energies on what they did best, hauling bulk commodities long distances. Innovations that augmented the chosen mission were embraced while those that did not were shunned. In doing so, railroads elevated engineering and engineering principles above the forces of the market and economics. “The health of the industry as a whole,” was described in engineering, not economic terms (p. 268).

The final portion of the book is titled, Friction in the Machine, 1904-1920, and is composed of two chapters. Usselman asserts that the well-oiled and ordered machine that engineers and managers constructed during the late nineteenth century came under increasing assault from all sides after 1900. Mergers and consolidations left the railroad industry with seven large systems that controlled almost two thirds of the mileage in the United States. With increasing consolidation, government regulation also increased, culminating with a strong and forceful Interstate Commerce Commission that actively intervened in railroad business and set rates and policies. Traffic volumes increased and began to stress existing infrastructure and technologies. Finally, competition in the form of motor transport began to be a concern, although the inroads made by trucks and automobiles prior to 1920 were slight. To respond to these new challenges railroads backed away from the engineering ethos that they had embraced earlier. They sought more flexible ways of serving their customers. Ironically, as the railroads lessened their dependence on engineering and efficiency, the public and the government became enraptured with Scientific Management and even used these techniques against the railroads in rate disputes. The book is well documented with extensive footnotes and index. Usselman consults a wide variety of archival sources including government reports and trade magazines and journals. He focuses on two large and progressive railroads for much of his analysis — the Pennsylvania and the Chicago, Burlington & Quincy, although the Baltimore & Ohio is also mentioned at length. This leads to one small problem with the work. By choosing railroads that were clearly in the vanguard, others that may not have been as progressive are not explored. During the period of his analysis, there were literally hundreds of railroads with a wide variety of operating, management and engineering cultures. Bringing other roads into the narrative would serve to enhance the work. Railroads were not quite the monolithic industry that Usselman presents. Full standardization of such things as locomotive design was not achieved until the diesel revolution after World War II. At times Usselman may overstate his case to make his points. Railroads did experience much expansion after 1876 and the engineering ethos was strongly felt throughout the 1920s. The first section can be a bit slow and plodding but once the book gathers steam the second and third sections shine like well burnished steel rails. These problems, however, are minor compared to what Usselman has accomplished with his work. He sets out to look at a hugely important industry and its struggles with innovation over a long period of time and to tie it into the larger stream of American history. He succeeds at this task and then some. This will stand as an important work, not only in the history of technology and economic and business history but in American history in general for years to come.

Jeff Schramm, Assistant Professor at the University of Missouri — Rolla, is currently working on a manuscript about the dieselization of American railroads.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Main Lines: Rebirth of the North American Railroads, 1970-2002

Author(s):Saunders Jr., Richard
Reviewer(s):Childs, William R.

Published by EH.NET (April 2004)

Richard Saunders, Jr., Main Lines: Rebirth of the North American Railroads, 1970-2002. DeKalb, IL: Northern Illinois University Press, 2003. xxi + 436 pp. $49.95 (cloth), ISBN: 0-87580-316-4.

Reviewed for EH.Net by William R. Childs, Department of History, Ohio State University.

About ten years ago, a wholesaler in Columbus told me that he could deliver a boxcar of fresh fruit from the Valley in Texas to central Ohio in twenty-four hours — faster than truckers could do it. Fifteen years before, when I was a truck driver, that was not possible. The wholesaler’s claim reminded me that the summer before, while driving out West, I had come across some incredibly long freight trains — and lots of them and none with cabooses. Something was going on with railroading, something I had not encountered in my own research on the pre-World War II era. Apparently the railways had finally put it all together to realize the inherent scale economies that their industry held over trucking. Even today few outside the transportation industries are aware of just how efficient and central to the American economy are the railroads.

Richard Saunders, Jr., who teaches history at Clemson University, offers in Main Lines a sprawling narrative to explain how and why the revolution in railroading occurred between the mid-1970ss and 1990s. The book furnishes two general contributions. First, it lays out the contours of the revolution in railroading, narrating how the various interests interacted with technology and politics to help the railways become once again a significant artery in the nation’s transportation system. Second, it furnishes railroad buffs detailed stories of numerous railways, many of which disappeared into necessary mergers or were abandoned entirely.

Saunders claims he is giving “readers the tools — the factual foundation — to create their own synthesis or theory if they so wish” (p. xii). Saunders’ bibliography lists important government records (ICC and congressional hearings especially), and it is clear that he is familiar with the key industry journals and “cultural” studies in management and business history. His sometimes engaging narrative, however, does not always fully develop some of the key points.

Nonetheless, he offers some cogent analyses. He establishes the industry’s economic structure and follows the interests — management, labor, shippers, local communities, and politicians — as they struggle to save the industry from itself. He does not shy away from concluding who was right and who was wrong at particular points in time. His narrative includes examples of managers who were farsighted and those who were not in the use of technology and in negotiations with labor. He understands better than most the various constraints under which the Interstate Commerce Commission (ICC) operated. On numerous occasions he chastises free-market ideologues, carefully noting that it was a combination of private and public sector efforts that created the railroad revolution.

The book has twelve chapters. Chapter 1 is a summary of his award-winning book, Merging Lines: American Railroads, 1900-1970 (2001). It and the next chapter chronicle the period before the revolution when the Penn Central went bankrupt, numerous approaches to dealing with the railways were debated (from nationalization to dissolution), and Amtrak became a reality. (Saunders argues that even though Amtrak has had its problems, its creation relieved a great burden from the freight railways.) By 1970, the railways’ problems included lack of capital for upkeep and expansion of the rails, management’s inability to master technology, labor’s intransigence in the face of change, generally poor service to shippers, and lack of flexibility to abandon inefficient routes.

Chapters 3 through 6 are the heart of the book. The crisis in railroading peaked in 1973 even though the rails were carrying more freight than ever before. The Regional Rail Reorganization Act of 1973, or the 3R Act, laid the groundwork for future progress in rehabilitating the railways. Congress established the United States Railway Association (USRA), a nationally chartered non-profit corporation, to plan an efficient and smaller-scale rail system in the Northeast and arrange financing for it. In effect, it was creating Conrail, the successor to the Penn Central. The midwife role of the USRA was not without complications, as Congress included various entities in the process. Much of the detailed planning fell to the ICC, but the Department of Transportation (DOT) also intervened. All of this occurred, moreover, during the Nixon and Ford administrations, both of which preferred more reliance on the private sector. Labor continued to resist change and various communities that would lose rail service protested to their congressional representatives. With Conrail, which began operation in spring 1976, “Government was godfathering a for-profit corporation that would have no choice but to inflict a lot of pain on a lot of communities before it could earn a profit” (p. 114). Meanwhile, Congress enacted the Railroad Revitalization and Reform Act of 1976, or 4R Act, not only to furnish temporary aid to the rails but also to ascertain the long-term requirements for the entire national railway system and to loosen restrictions on rate making (which, Saunders correctly noted, harkened back to post-World War I discussions). After decades of neglect, the politicians were mixing private and public approaches to solve the railroads’ problems.

Saunders focuses on the major economic forces (technology, investment, and productivity) and the necessity for the private sector executives to have more freedom to set rates, merge with other lines, and abandon outdated lines in order to enhance profitability. He shows how intermodal traffic (truck trailers and containers on flatcars) and transportation control systems (TCS) formed the technological bases of the revolution. He outlines how the Carter Administration, within the context of deregulation of other industries, particularly airlines, pushed successfully for the Staggers Act of 1980, which further loosened the regulations over rail rates and operations. This deregulation left only antitrust and safety issues to be monitored by the government.

Saunders is less successful in showing how expanded investment opportunities were a necessary contribution to the revolution. Increased investment in refurbishing rails and incorporating new technology (e.g., cranes to lift the containers onto and off flatbeds) was essential if the rails were to serve shippers’ needs and become profitable; but railroading historically had a very thin operating margin to create profits to plow back into enhancing service. Saunders argues that the 1981 Economic Recovery Tax Act (ERTA), especially its provision that enabled firms to sell depreciation deductions to other companies, added more investment funds to the railroad industry. While I think his point is well-taken, he should have developed this argument more fully in the text and notes. Noting which railways benefited and how much money each spent and on what (new rails, TCS, and other technology) is needed here.

Saunders consistently follows the labor thread through his sometimes complex narrative to show that management and labor did finally cooperate to improve rail operations. The break point came in 1991 when, ironically, congressional Democrats forced labor to make concessions. Saunders notes, however, that in several instances it was the arrogance and ignorance of management, not labor intransigence that had prevented productivity growth.

Chapters 7 through 10, which focus on the various regions, offer important if often dry information on how the railway industry operated through the “Super Seven” systems from the mid-1980s to the mid-1990s. Individuals and the problems of mergers are highlighted. Chapter 11 recounts the reduction from seven to six systems and the problems the mega-mergers faced during this time (antitrust fears, captive shippers, and combining different corporate cultures into efficient service). The concluding Chapter 12 notes that while the narrative reveals a success story, it does not follow that the future will repeat the past. With government support, the railways had successfully married technology with effective management approaches and improved management-labor relations, but in order to remain viable in the nation’s transportation system, the railways needed more capital. And it is not clear where that investment is going to come from.

In conclusion, Main Lines is an important book that transportation historians should read. Saunders has met his purpose of presenting a narrative of an important story in late twentieth century economic history. Other historians may read it for the context before they pursue related topics, such as the advent of intermodal operations, the economic and subsidy relationships between all transport modes, and the impact of the deregulation movement on the economy.

William R. Childs, author of Trucking and the Public Interest (1985), will publish with Texas A&M Press next year a history of the Texas Railroad Commission and economic regulation in the U.S. to the mid-twentieth century.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Price of Progress: Public Services, Taxation, and the American Corporate State, 1877 to 1929

Author(s):Higgens-Evenson, R. Rudy
Reviewer(s):Brownlee, W. Elliot

Published by EH.NET (November 2003)

R. Rudy Higgens-Evenson, The Price of Progress: Public Services, Taxation, and the American Corporate State, 1877 to 1929. Baltimore: Johns Hopkins University Press, 2003. x + 168 pp. $39.95 (cloth), ISBN: 0-8018-7054-2.

Reviewed for EH.NET by W. Elliot Brownlee, Department of History, University of California, Santa Barbara.

R. Rudy Higgens-Evenson analyzes an important aspect of the history of government between Reconstruction and the New Deal: the delivery and financing of public services by state and local governments. This is well-ploughed terrain, but he surveys it from an unusual perspective: the relationship between public services and the taxation of corporations.

He begins by discussing calls in the 1870s for reform of the property tax, the backbone of state and local finance. He focuses, in particular, on the charges that the property tax did not reach corporate wealth, particularly in the form of stocks and bonds, and proposals for states to replace local taxation of corporations, especially railroads, with special state-level taxes. Pressure to reform increased after 1880, he suggests, as a result of the incremental growth of spending for public schools and insane asylums. In the author’s interpretive model, the driving force in the expansion of state and local government was “activist government” (p. 2).

“Only the deep pockets of the corporations could support the new functions undertaken by state and city governments,” the author claims (p. 9). Pressure to reform public finance by taxing corporations was especially acute in the industrial Northeast. During the 1880s, many states enacted modest, state-level taxes on corporations but provided corporations relief by providing exemptions from local property taxes, which were increasing in cities making new infrastructure investments. Subsequently, state governments raised their corporate taxes to fund new public services and, at the same time, to crack down on “corporate tax-dodging” (p. 48). Corporations, in response, cooperated and tried to guide public policy. The result was the emergence of what he calls the “corporate state.” Higgens-Evenson explains: “Corporation taxes funded new public services in a cooperative arrangement between business and government along the lines laid out by Alexander Hamilton in the 1790s” (p. 9).

In contrast, within what the author calls “the Jeffersonian republics of the South, Great Plains, and Far West,” state governments focused more on regulating corporations (primarily the railroads) rather than taxing them. He explains that these states were less industrial and were “guided by political ideas that were more in line with those of Thomas Jefferson.” These states adhered to “local government, property taxation, and minimal state-level services” (p. 10).

Subsequent public investment, particularly on highways, tested the revenue systems of states throughout the nation. Between 1907 and 1929, largely because rising expenditures stressed the property-tax system, the states that Higgens-Evenson describes as the “most progressive” adopted general or corporation income taxes. Almost all states turned as well to gasoline taxes, but the taxes turned out to be most important to the “Jeffersonian republics.” There, the author finds, gasoline taxes allowed some of these states to build roads “without upsetting the older order of property taxation” (p. 91).

Corporation and income taxes, he argues, prompted the creation of the final element in the corporate state. These taxes “brought business officials into government in new roles, formal and informal.” The representatives of corporations promoted the rise of government research bureaus, directed state government reorganizations, and advised on tax administration “The new relationship between business and government, particularly in the states where corporation and income taxes supplied a significant share of revenues, completed their transformation into corporate states” (p. 93).

Much of the story that Higgens-Evenson relates will be familiar to students of the fiscal history of the United States between the Civil War and the Great Depression. Nonetheless, they will find his book interesting and useful. He understands the importance of connecting the history of taxation with the history of public expenditures; he mobilizes some valuable new data on state government expenditures; and he provides important suggestions as to the precise relationship between spending and taxing in some key states.

The author covers a great deal of intellectual ground in this stimulating book. As a consequence of its ambitious scope and relative brevity, he cannot develop some of his key ideas, such as the role of “Hamiltonian” and “Jeffersonian” philosophies. His “brief survey” of the financial systems of the states, he writes, “applies the comparative method to state revenues and expenditures to explore why some states became corporate and some became Jeffersonian” (p. 11). But he never assesses the extent to which ideas either played an autonomous role in the formation of fiscal policy or simply reflected underlying economic structures. A related problem is a rather thin exploration of the sources of “activist government.”

Higgens-Evenson also neglects important topics in the realm of institutional history. For example, he ignores some important administrative problems that shaped the taxation of corporations by states. In his emphasis on the failure of the general property tax to reach “intangible” property like stocks and bonds he neglects what was the biggest problem that state governments had with the tax. This was the control that county governments exercised over property tax assessment. As a consequence of this control, they generally engaged in a competitive under-valuation of assessment that resulted in significant inequities and growing distrust of property taxation. States concluded that they had to develop their own tax base, separate from that of local government. But they then immediately faced other administrative problems. These blocked adoption of either income or sales taxes that were general in scope. It was often for administrative convenience, as well as previous failures to tax corporate wealth, that states turned to, or expanded, taxation of corporate property, franchises, and income.

Also in the institutional realm, the author neglects analysis of corporate goals and strategies. He tends to regard corporations as engaged in the single-minded pursuit of reductions in taxing and spending. Corporations, however, often had strong interest in building public infrastructure and expanding various public services, especially education. Corporations were often willing to accept, and sometimes promoted, higher taxes as an inexpensive alternative to making private investments but reaping little or no return on those investments because of free-riding competitors.

Finally, he might have developed further his suggestions regarding the way in which variations in economic structure (and, in turn, the distribution of political power) across the states and regions produced variations in tax policy. To do so would have required more attention to variations in corporate strategies and structures. For example, an explanation of why Wisconsin and California taxed manufacturing corporations more heavily than did corporation taxes in New York would require paying attention to not only the small size of the manufacturing sector in Wisconsin and California but also the relatively small scale of manufacturing corporations in those two states, and to important disagreements over taxes within the business community (including commercial agriculture).

In sum, Higgens-Evenson’s book is a very welcome addition to scholarship on the history of public finance. Its ambitious reach and interpretive framework may well stimulate much needed research on the political economy of business taxation during the period in which the modern corporation, and perhaps the “corporate state,” emerged.

W. Elliot Brownlee is Professor Emeritus in the Department of History, University of California, Santa Barbara. His latest book is The Reagan Presidency: Pragmatic Conservatism and Its Legacies (Lawrence, KS: University Press of Kansas, 2003), which he co-edited with the late Hugh Davis Graham. Included in the volume is an essay by Brownlee and C. Eugene Steuerle of the Urban Institute on Reagan tax policy. Later this year, Cambridge University Press and the Wilson Center Press will publish the second, expanded edition of Brownlee’s Federal Taxation in America: A Short History.

Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Roots of American Industrialization

Author(s):Meyer, David R.
Reviewer(s):Khan, B. Zorina

Published by EH.NET (November 2003)

David R. Meyer, The Roots of American Industrialization. Baltimore: Johns Hopkins University Press, 2003. xiii + 333 pp. $45 (cloth), ISBN: 0-8018-7141-7.

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

For many, agriculture and manufacturing comprise a defining part of the American national identity. Yet, in 2003 a mere two percent of the civilian labor force works in agriculture, and manufacturing employs less than ten percent. The reason for the prominent role still attributed to these two sectors in contemporary culture clearly lies in historical experience. Numerous journal articles have analyzed the sources of industrialization and economic growth, but few comprehensive book-length monographs have integrated the extensive body of literature in this area. David R. Meyer, a professor of sociology and urban studies at Brown University, therefore makes a useful contribution by reviewing how industrialization started in the agrarian United States.

The first chapter outlines what Meyer views as “the puzzle of the antebellum east.” By now every economic historian (especially those who are fortunate enough to know Dick Sylla) realizes that one must choose between Jefferson and Hamilton; however, Meyer further insists on a duel between Hamilton and Franklin. Franklin in 1760 thought that manufacturing developed in response to a scarcity of agricultural land. Hamilton, who better understood the concepts of specialization according to comparative advantage and subsequent gains from sectoral trade, predicted reciprocal benefits to investments in agriculture and manufacturing. According to Meyer, this is a duel in which Franklin has so far prevailed, since “most discussions of the roots of the antebellum East’s industrialization accept Franklin’s view” (p. 1) rather than Hamilton’s. It is Meyer’s objective to show that Hamilton was right after all.

The book includes ten figures and fifty tables, although the author restrained his instincts as a trained geographer and includes a mere five maps. The exposition is organized in two chronological parts, the first of which deals with the period between 1790 and 1820. The story by now is well-known. The first years of the Republic were challenging, but the new society was well-positioned to take advantage of its bountiful natural resources and human capital endowments. The “conventional view” and “standard interpretations” that Meyer seeks to disprove are that eastern agriculture was unproductive because of diminishing returns to poor soils, and lost market share because of competition with farms in the Middle Atlantic and Midwest. Farming households tried to resist the transition to capitalism, but ultimately were integrated into outsourcing enterprises and factories. These claims are inconsistent with the evidence, so the “roots of eastern industrialization remain obscure” (p. 4).

The author offers an alternative explanation: that agriculture in the East was productive. Timothy Dwight, President of Yale in 1796, noted that Connecticut farming presented “a scene uncommonly cheerful,” and for good reason. Farmers were not passive victims of diminishing returns to land. They responded to price incentives, adopted new techniques, shifted to higher-valued output, and made investments in more effective inputs, all of which led to productivity growth. When efficiency in agriculture increased, it released surplus labor to the industrial sector. Rising wages and incomes in agriculture also expanded the market for finished manufactured goods. Agriculture and industry benefited each other through backward and forward linkages that created multiplier effects. Meyer considers the experience of shoemakers in Massachusetts, Connecticut workshops, and textile mills across the Northeast. Industrialization was encouraged by the availability of financial capital through banks and “insider lending.” Productivity benefited from technological progress as gauged by patenting activity. However, researchers who argue that patenting per capita expanded in response to changes in market access when water transportation improved have overestimated the influence of alternatives to wagons. Meyer contends that “Until about 1850 wagons offered fierce competition to waterways, canals, and railroads for transporting farm products and most manufactures,” (p. 33); moreover, “most firms did not require waterway transport because wagons provided low-cost shipment for manufactures,” (p. 67). In short, most transportation benefits were derived from “lowly wagons and road improvements.”

The rest of the book deals with the period between 1820 and 1860 and basically expands on the same points. By the 1860s the Northeast accounted for a little over a third of national population, while its rate of urbanization had increased to 35 percent. Despite the relative decline of the rural population, in absolute numbers its level was double what it had been in 1810. Eastern farms were able to cope with increased competition from the Midwest by switching from grains to higher-valued dairy products, fruit, and vegetables, for urban consumption. They benefited from the diffusion and adoption of agricultural inventions. By 1860 the East produced 74 percent of the value added in manufacturing. After the 1840s metropolitan centers and (to a lesser extent) their satellites became more diversified and industrially specialized. Manufacturing productivity increased from 2.1 percent annually to 3.2 percent. Although capital-intensive establishments experienced higher efficiency, improvements in productivity were distributed widely across industries and firms. Case studies again focus on footwear, cotton textiles and the brass industry. The author repeats his claims that, in the light of the relative efficiency of wagons, the net economic benefits of the Erie and other canals have been overestimated. As for railroads, “stagecoaches and wagons offered formidable competition for passengers and freight” (p. 156) and eastern railroads “generated minimal direct economic benefits” (p. 157).

By now every economic historian (especially those who are fortunate enough to know Dick Sylla) already realizes that Hamilton was right. This work for the most part comprises a synthesis of well-known original research on agriculture and industrialization by Jeremy Atack, Robert Fogel, Robert Gallman, Robert Margo, Kenneth Sokoloff, and Thomas Weiss, to name only a few who have already addressed the “puzzle of the antebellum east.” The author’s own interpretations and contributions are at times a little more puzzling. However, for those who are unfamiliar with (and not averse to) economic history, this book will likely provide a convenient introduction to the issues.

Zorina Khan is Associate Professor of Economics at Bowdoin College. She is the author of “The Fuel of Interest”: Patents and Copyrights in Early Economic Development (forthcoming, Cambridge University Press).

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):North America
Time Period(s):19th Century

Organizing America: Wealth, Power, and the Origins of Corporate Capitalism

Author(s):Perrow, Charles
Reviewer(s):Howard, Vicki

Published by EH.Net (August 2003)

Charles Perrow, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism. Princeton, New Jersey: Princeton University Press, 2002. ix + 259 pp., ISBN: 0-691-08954-X.

Reviewed for EH.Net by Vicki Howard, Hartwick College, Oneonta, New York.

The last few years have seen a growing popular and scholarly interest in globalism. In an era when the power of large transnational organizations seems absolute and inevitable, works that uncover alternate ways or paths not taken in the history of American economic life perform a useful service. Charles Perrow’s new synthesis, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism, tells the story of the nineteenth-century beginnings of the hierarchical, bureaucratic organizational form that would eventually transform all social and economic relationships. Perrow focuses largely on the early textile mills of Manayunk, Pennsylvania, Lowell, Massachusetts, the Kensington area mills of Philadelphia, and finally, the railroads. Although a mass-production model that celebrated and legitimized a ruthless drive for the accumulation of wealth became hegemonic by the beginning of the twentieth century, much of the nineteenth century, he argues, was typified by a flexible-production model that reinforced artisanal values and moderate wealth, and had fewer social costs and negative externalities — a model that privatized railroads would help destroy. Drawing on the insights of organizational sociology, he explains how the large, privately held, minimally regulated corporation came to dominate over other business forms in the United States. Applying organizational variables to several case studies, he attempts to construct a new paradigm for industrialization in the nineteenth century.

Organizing America privileges large bureaucratic organizations over “culture, politics, technology, efficiency concerns, and entrepreneurship” (p. 20). Such a claim requires substantial theorizing, which Perrow provides in his introduction and a chapter titled, “Preparing the Ground.” He justifies his organizational focus, arguing that while organizations are influenced by culture, they also shape culture. Drawing on Max Weber and Karl Marx, he holds that organizations worked as tools that serve particular interests and had the ability to centralize power and wealth, often at great social cost. They generated wage dependence, created divisions between different groups, and had tremendous negative effects on their external environment. Moreover, they often interacted with each other in unanticipated ways. When combined with a weak state and a legal framework that worked in favor of large organizations, corporations were able to take the form they did in the United States in the twentieth century.

Drawing on studies by Cynthia Shelton, Philip Scranton, Frank Dobbin, Walter Licht, and others, Perrow recasts his subject “in light of the organizational requisites” and finds an economically diverse America (p. 47). In the shift from an agricultural to an industrial economy, communal organization was replaced by markets, networks, and then hierarchies, though this transition did not proceed in a completely linear fashion. In a world characterized by the socioeconomic form of “community,” producers were “subsistence farmers” that engaged in little market behavior (p. 23). As economic relationships were more market-oriented, monetary exchange became more prevalent. The market stage produced a “system of small, autonomous firms with relatively skilled workers, with minimal local government units, and small cultural institutions” (p. 26). At the other end of this economic relationship was the hierarchical form, characterized by large, centralized units employing mass production and bureaucratic organizations. Some communities, like the “walking city” of Philadelphia in the early years of the century, were a mixture of market and community (p. 27). In other places, like the Lowell textile mills of the Boston Associates, organizations moved towns directly from a community relationship to a hierarchical form, without passing through a significant market or network phase. The Lowell mills continued to have elements of community, such as long-term employment, payments in kind as wages, and patriarchal authority over leisure time and religious expression. In the early nineteenth century, Manayunk and Lowell prefigured the hierarchical format that would come to dominate in the late nineteenth century. Organizing America makes the good point that this economic path was never inevitable. Drawing on Philip Scranton’s Proprietary Capitalism, Perrow puts forth an alternate model of the network system of Philadelphia, which was more typical up to the 1880s. Using the case of the highly networked textile firms in the Kensington area of Philadelphia, he shows how, unlike the hierarchically organized, large, centralized, bureaucratic firm involved in mass production and mass distribution, the smaller, innovative firms in Kensington had “more positive externalities for workers and the community” (p. 95). This network model allowed for cooperation as well as competition.

Unfortunately, with the rise of railroads, “the second big business,” this network model disappeared and the middle way gave ground to the mass-production model by the end of the century (p. 96). Moving away from the efficiency argument of Alfred Chandler, and the neoinstitutionalist argument of Frank Dobbin that argued for the importance of culture, Perrow attributed the rise of the privatized railroad organization in the United States to their campaign for private ownership and their power as “corrupters” (p. 159). Railroads, for logistical and technical reasons had to be controlled completely by whoever owned them, though this ownership could be private or public. This need for control brought about new organizations that were larger and more powerful than any seen before. In the United States, as opposed to his comparison cases in France and Britain, railroad ownership was privatized and went largely unregulated from 1830 to about 1880, after which it became a lightly regulated oligopoly. Railroad organizations were corrupt, involved in bribery, illegal financial dealings, and violation of regulatory statutes, and significantly, he argues, this corruption was organizational in origin, made possible by weak governmental institutions. In a way that was “important for the future of corporate capitalism,” railroad organizations’ corruption removed legal restraints, allowing corporations to amass greater wealth, rather than return it to the government or private investors (p. 142).

As in the rise of hierarchical organization in the textile industries, however, unregulated privatized railroads were not an inevitable outcome of history. Alternatives were possible, as the interesting case of the successfully state-owned and operated Western & Atlantic Railroad in Georgia (1836-1870) demonstrates. While divisionalization in railroad organization became the norm and the means for the creation of modern bureaucracies that allowed for the growth of massive corporations, he investigates two alternate organizational arrangements that would have distributed power and wealth more widely, without loss of efficiency. Arguing against Chandler’s inevitability thesis, he suggests that the centralized, departmental structure serving regional lines and the contracting out system were successful paths that could have been taken.

In each of his organizational interpretations of textile industries and the railroads, Perrow downplays cultural factors. Over the last decade or so many excellent histories of business and culture have appeared, all of which are absent in this story. Readers persuaded by such works might object to way Perrow privileges the organization over culture and fails to consider other categories of analysis, such as class, gender, race, or ethnicity, factors that certainly played a crucial role in labor-industrial relations and corporate life. However, readers interested in the history of economic life and in the origins of corporate capitalism in the United States will appreciate Organizing America’s new interpretation of the nineteenth-century and of paths not taken.

Vicki Howard recently received her Ph.D. in American Studies from the University of Texas at Austin. She is an Adjunct Assistant Professor at Hartwick College and is working on a book about the American wedding industry.

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):North America
Time Period(s):19th Century

Railroads and American Law

Author(s):Ely Jr., James W.
Reviewer(s):Hudspeth, Harvey G.

Published by EH.Net (July 2003)

Ely Jr., James W., Railroads and American Law. Lawrence, Kansas: University Press of Kansas, 2001. ix + 365 pp. $39.95 (hardcover), ISBN: 0-7006-1144-4.

Reviewed for EH.NET by Harvey G. Hudspeth, Department of Social Sciences, Mississippi Valley State University.

The History Book of the Month Club refers to this as the “first comprehensive legal history of the rail industry” which “chronicles the advent of the railroad and its impact on American law.” On that point, I have no argument. Regrettably, by nature, both railroads and American law are considerably dry subjects. A combination of the two therefore should not prove to be much better. While James Ely does attempt to challenge this notion in his latest work, I seriously doubt anyone is going to sit around and wait for the movie to come out. Nevertheless, Ely’s Railroads and American Law is a very thorough and comprehensive study of the joint evolutions of both railroads and the law. It is a work to which serious scholars of either or both subjects should pay special attention.

Seemingly deliberative in its effort to dichotomize between history and the law, the book can easily be divided into three distinct sections. While chapters one through four concentrate mainly on the development of railroads in the nineteenth century, chapters five through nine concentrate more on specific areas of the law. These include topics ranging from slavery and segregation to insolvency and liability for personal injury. Chapters ten through thirteen then pick up with the development of both railroads and railroad law through the twentieth century. While you cannot really separate neither law from history nor history from law, as both a historian and a former practicing attorney, I had little difficulty in determining which chapters would appeal mainly to the former as opposed to the latter.

In his epilogue Dr. Ely, a professor of both law and history at Vanderbilt University, recounts the various themes that emerge from his study. While he is most persuasive in dispelling the myth that the federal government allowed nineteenth century railroads to operate in an atmosphere of “total laissez-faire,” his argument that railroad regulation was based largely on political and regional concerns is not exactly new to most historians. On the other hand, Ely’s contention that railroad policy was determined more by legislators than judges is new and he does much to refute the long-held view that Gilded Age courts were essentially the “handmaidens” of the railroad industry. Finally, Ely does an excellent job in tracing the evolution of both the railroads and railroad law from local to national entities.

Ely goes on to argue that the federal government’s attempt to regulate America’s railroads has, at best, left a “cautionary legacy.” Noting that the vaunted reforms of the Progressive Era were mistakenly aimed more at previous problems than future potential difficulties, he concludes that these regulations were ultimately self-defeating insofar that they placed the industry in a straightjacket that inevitably led to its economic decline. In the decades that followed, the bureaucracy’s remedy to this was to impose even further unrealistic regulations that only served to make matters worse. In the meantime, Ely reasserts his prior contention that the courts, rather than issuing rulings deliberately designed to bolster the railroads at the expense of “weaker segments of society,” instead “made no persistent attempt to shield railroads from public controls.”

In his conclusion, Ely maintains his prior assertion that the development of the railroad industry in the nineteenth century helped stimulate the corresponding development of railroad law which in turn established the model for our current law on monopolies and American industries overall. While legislators and judges might have occasionally been guilty of being overly protective of railroads as a means to encourage overall economic growth, these interests had to ultimately be balanced by other considerations affecting the overall American public. As our fears of a dominant railroad monopoly have long since vanished in favor of growing fears over potential monopolies in other industries, Ely’s study is undoubtedly a good model in which to predict the future.

Dr. Harvey G. Hudspeth is a graduate from the University of Mississippi and currently serves as History Program Coordinator at Mississippi Valley State University. A former practicing attorney, he has published two articles related to nineteenth century railroad development in the West Tennessee Historical Society Papers.

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

Encumbered Cuba: Capital Markets and Revolt, 1878-1895

Author(s):Fern√°ndez, Susan J. F
Reviewer(s):Salvucci, Linda K.

Published by EH.NET (June 2003)

Susan J. Fern?ndez, Encumbered Cuba: Capital Markets and Revolt, 1878-1895. Gainesville: University Press of Florida, 2002. xii + 203 pp. $59.95 (hardcover), ISBN: 0-8130-2564-8.

Reviewed for EH.NET by Linda K. Salvucci, Department of History, Trinity University.

Encumbered Cuba is a timely addition to the recent spate of historical works commemorating the centennial of the War of 1898 on the one hand and the latest print and broadcast analyses of “Anglobalization” by Niall Ferguson and his critics on the other. Inspired by such ongoing debates on the relationship between empire and economy, this monograph is grounded in sources from Cuba, Spain and the United States, especially the Braga Brothers Collection at the University of Florida. At issue are the very nature of late nineteenth-century Spanish colonialism and its relationship to subsequent economic growth and development in Cuba. Of course, the imperial bond between Spain and Cuba was rendered infinitely more complicated and complex, if not distorted entirely, by the pervasive influence of the United States. Indeed, for much of the nineteenth century, Cuba was a commercial and financial dependency of the United States, while remaining a political dependency of Spain (p. 47). The peculiarities of this situation make it more difficult than is often the case for historians to assess cause and effect, but Fern?ndez makes a credible effort to do so. She makes a compelling case for the significance of the period between the end of the Ten Years War (1868-1878) and the outbreak of rebellion again in 1895. During these years, she argues, Cuba should have been able to diversify its economy but did not, because Spanish colonialism had failed to foster the necessary institutions for credit and investment.

Cubanists will find this monograph an interesting prologue to Allan Dye’s Cuban Sugar in the Age of Mass Production (Stanford, 1998). Fern?ndez begins her intricate tale with an evocative description of the Columbian Exposition of 1893 and its “homage to European colonialism” (p. 1). Drawing upon the work of Spanish economic historians such as Gabriel Tortella Casares and the still useful insights of Stanley J. and Barbara H. Stein in The Colonial Heritage of Latin America (New York, 1970), she reviews the problems inherent in Spanish colonialism. Overall economic decline in the nineteenth century and the low level of technological development in the metropolis itself made for a “takeoff into sustained dependency” on the island (p. 7). Spain resisted the gold standard and free trade; the proportion of its government budget devoted to servicing debt far exceeded expenditures on infrastructure. In Cuba, railroads failed to handle all the sugar produced, let alone to stimulate industrialization or even diversification. A class of bourgeois bankers never developed to meet the significant credit needs of the sugar, tobacco, coffee and mining sectors because “personal favoritism” guided the appointment of “loyal Spaniards” to bank directorships and the subsequent granting of loans to borrowers (pp. 80, 91). In short, the Banco de Espa?ol de la Isla de Cuba (BEIC) and the Banco Hispano-Colonial (BHC) accommodated their functions to government interests and goals. For example, the BEIC alienated the elites outside Havana through its role as a designated tax collector; eventually, it found itself in the position of refusing its own notes for collection of fees to the government (p. 102). The Cuban planter class increasingly turned to the United States as the source of finance capital, paid for by ubiquitous sugar exports. All this was in evidence as early as 1866, when a crisis in Cuban money markets occurred.

Not surprisingly, the Ten Years War only exacerbated these interrelated trends and shortcomings. The impending demise of slavery in Cuba changed cash flow requirements for large producers, while freed slaves would have different credit needs as well. Added to this difficult mix were persistent currency shortages; by the early 1880s, there was not even enough currency available to pay winners of the Cuban colonial lottery. Spanish authorities and Catalan businessmen wanted the banks to stabilize the currency and to act as agencies for mobilizing private capital, but they were simply not able to do so.

During the last two decades of the nineteenth century, Spain’s need for Cuba increased while Cuba’s need for Spain decreased. Fern?ndez points out that the owners of large estates needed U.S. sugar sales and credit to survive Spanish colonialism. In short, Spain failed to provide its once “ever faithful isle” with the benefits of colonialism. The situation worsened dramatically in 1893, as economic crises occurred at other points in the Atlantic basin, most notably the United States. “Between 1893 and 1895, rebellion against Spanish colonialism in Cuba emerged from cross-class opposition to failed Spanish fiscal and monetary policies” (p. 143). Moreover, she asserts, the key element in the Cuban revolt was the perception that Spain could not lead Cuba to economic recuperation after 1894 (p. 150). Apparently, the United States, whose government knew how to recuperate from fiscal crises, could.

Or could it? The arguments of the last chapter of this book are a bit confusing, as Fern?ndez reverts back to her central premise, that the crucial moment for Cuba was not 1898, but the years between 1870 and 1895, when failure to develop adequate credit and investment institutions determined the persistence of sugar monoculture. Comparisons and contrasts with the rest of Latin America are attempted, but not fully pursued. While it is certainly true that, unlike elsewhere, domestic problems in Cuba could be blamed on colonialism (p. 164), the cause-effect relationship needs to be defined more systematically, perhaps by tracking the economic interests and political behavior of key planters and their creditors. Another way to approach this would be to propose a counterfactual: what if Cuba had become independent along with the rest of the Spanish colonies in the New World? In other words, it seems to me that the timing of Cuban independence might be as critical a variable as Spanish colonialism. Had Cuba achieved political independence in the 1810-20s, would the prospects for diversification have been significantly better? Would Cubans have put borrowed capital to better use? Or was U.S. influence already strong enough to have locked Cuba into a system of trade and borrowing that still depended upon sugar monoculture? Perhaps it is developments in the decades before the Ten Years War that proved just as decisive in the long run.

Susan Fern?ndez has tackled a complex and vital subject. While her work may be of greatest interest to specialists in nineteenth century Cuban history, she raises important questions for all who remain intrigued by the relationship between colonialism and economic development.

Linda K. Salvucci, Associate Professor of History at Trinity University in San Antonio, is working on a book project, “Ironies of Empire: The United States-Cuba Trade under Spanish Rule, 1760-1898.” With Richard J. Salvucci, she is coauthor of “Cuba and the Latin American Terms of Trade: Old Theories, New Evidence,” Journal of Interdisciplinary History, XXXI: 2 (Autumn, 2000), 197-222, which won the Conference on Latin American History Prize in 2001.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):19th Century

The Real Lincoln: A New Look at Abraham Lincoln, His Agenda, and an Unnecessary War

Author(s):DiLorenzo, Thomas J.
Reviewer(s):Gunderson, Gerald

Published by EH.NET (September 2002)

Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His

Agenda, and an Unnecessary War. Roseville, CA: Prima Publishing (a division

of Random House), 2002. xiii + 333 pp. $24.95 (cloth), ISBN: 0-7615-3641-8.

Reviewed for EH.NET by Gerald Gunderson, Shelby Cullom Davis Professor of

American Business and Economic Enterprise, Trinity College, Hartford, CT.

Tom DiLorenzo is known for speaking his mind, which is very much the case in

his new book, The Real Lincoln, where he takes on one of America’s

greatest heroes and icons. He argues that Lincoln encouraged the Civil War as a

vehicle to increase the role of the Federal government.

This reviewer does not doubt that Lincoln sought ways to expand centralized

government and is sympathetic to DiLorenzo’s argument that Lincoln’s wartime

policy improvisations created a precedent for mischief later. The problem is

that this book ignores much of the relevant scholarship that has reshaped our

understanding of American growth and institutions. Take, for example, slavery,

which plays a central role in DiLorenzo’s argument. He dismisses it as an

inefficient institution, lacking incentives for growth such that it probably

would have disappeared if left alone. The standard interpretation now, however,

initiated by Robert W. Fogel and Stanley L. Engerman’s, Time on the

Cross, is that American slavery contained powerful incentives for growth

that yielded a long-term upward trend in slave prices. Thus, the market

certified rising productivity of slave labor as well as boosting the wealth of

their owners. There was little prospect that slavery would die economically;

that required an outside push. The slave population also grew, keeping pace

with that of the (historically exceptionally high) free population. This was

achieved by a system of incentives developed within slavery that encouraged the

slaves to work and to earn more responsible positions.

American slavery differed from all other major slave holding areas in the

nineteenth century. While the populations of others tended to die out and had

to supplemented by further imports of slaves, the American population expanded

robustly, turning relatively small imports of slaves into, by far, the largest

and most valuable supply in the world. American slaves’ value was approaching

$3 billion by 1860, so that actions that implied only relatively small

reductions in slave prices, such as not returning runaway slaves, could produce

losses of property in the hundreds of millions.

This wealth explains why emancipation in the U. S. did not take the peaceful

course that it did in all other nineteenth-century slave societies. DiLorenzo

believes America’s exception indicts Lincoln for pressing toward war but that

overlooks how much more expensive compensated emancipation would have been in

America. The latter also would have been much larger than the cost of fighting

the war was expected to be. It is true, as DiLorenzo argues, that the Civil War

proved to be much larger and more expensive than compensated emancipation. But

the Civil War became much larger than Americans, or most others in the world

for that matter, expected. Once committed to war the ex-ante predictions proved

much too small. Indeed, the Civil War proved to be a watershed in military

history, becoming the first of what military historians call “modern wars.”

Such wars are an order of magnitude larger than their precedents, such as the

American Revolution, putting far more resources — relative to the economy —

into the war. (The Europeans would not experience the shock of this intensified

style of warfare until World War I, which they initially called the World War

because they could not imagine there ever be another one like it.)

Ironically, the dramatic increase in the relative size of war probably results

from economic growth. Not only were there more resources that could be put into

action but also the relative cost of doing so went down as improvements in

transportation allowed the military continuous resupply. During the Revolution

land campaigns stalled after about two weeks as the horse-drawn supply line

dried up. In the Civil War, however, railroads and steamboats kept the

reinforcements coming continuously.

A corollary of modern war is that the enemy is not just the opposing armed

forces, but also his entire economy because that feeds the resources that keep

the conflict going. DiLorenzo criticizes the Northern government for being

unduly destructive of the Southern civilian economy but that is the implication

of modern war, and one that participants in other such wars soon discovered for

themselves.

DiLorenzo believes that Lincoln’s wartime attack on slavery was a hypocritical

tactic to justify continuing the war. He cites Lincoln’s statement at the

beginning of the war that the Union — not slavery — was the real issue. He

also argues that only a tiny share of the population were hard-core

abolitionists. One difficulty in making such a judgment is that antislavery

sentiment in the North — as in the rest of the North Atlantic economies —

grew rapidly prior to 1860. In 1840 or even 1850 it was still a minority view,

focused at election time, in splinter, noncompetitive political parties. The

Republican Party, emerging as a national party, in the 1850s was the first to

have a generally understood antislavery cast. This was not a commitment to the

immediate abolition of slavery nationally but rather the median Republican

voter believed that slavery was wrong and should be nudged toward eventual

elimination. As of 1860 that meant attacking the low hanging fruit, slavery in

federally controlled territories and the District of Columbia, while refusing

to aid recapturing run away slaves. But the eventual intention was clear,

enough so that Southern slaveholders saw Lincoln’s election as a capitalized

reduction in their slave wealth if they remained in the Union.

As with his dismissal of slavery, DiLorenzo doubts that the appeal of the

Federal Union really should have had much influence on the conflict. Again we

need to recognize the profound effect that economic growth had had since the

Constitution was approved some seventy years prior. In 1789, most Americans

identified themselves with their state in good part because most of their

economic efforts were on their own farms or with neighbors. Of course, most of

their home states had already been established for more than a century and had

recently been the focus of their resistance to British power. In contrast, by

1860, drastic reductions in transportation costs prompted Americans to become

much more economically specialized, buying and selling over greater distances,

including across state lines. A high proportion of Americans, such as Lincoln,

had moved to new states, including at least a third living in states that did

not exist in 1789. American naturally identified with the larger context in

which they now operated. Peter J. Parish, in The American Civil War, has

captured how mid-nineteenth-century Americans had paired their deference for

the Constitutional basis of their society with the concept of Union. Similar to

getting rid of slavery, preserving the Union had significant appeal to

Northerners and their representative, Abraham Lincoln.

In effect, The Real Lincoln is the latest example of one of the largest

topics of American historiography: what caused the American Civil War. Numerous

alternative causes have been suggested, many of which were clearly flavored by

the dominant concerns of the time they were propounded. For example, in the

aftermath of the shockingly high costs of World War I, a group of historians

reinterpreted the Civil War as a mistake that could have been avoided had it

not been for the bungling politicians of that era. Tom DiLorenzo has returned

to a similar theme, the war was unnecessary except for — in this case — one

conniving politician. But again, as so often in the past, the pattern appears

to repeat, the effort to reach a conclusion has outrun its basis in history.

The reviewer, Gerald Gunderson, is editor of the Journal of Private

Enterprise. The author, Thomas DiLorenzo (Professor of Economics, Loyola

College in Baltimore, MD), serves on the Board of Associate Editors for the

Journal.

Subject(s):Servitude and Slavery
Geographic Area(s):North America
Time Period(s):19th Century

The Making of the Mexican Border: The State, Capitalism, and Society in Nuevo Leon, 1848-1910

Author(s):Mora-Torres, Juan
Reviewer(s):Baskes, Jeremy

Published by EH.NET (June 2002)

Juan Mora-Torres, The Making of the Mexican Border: The State, Capitalism,

and Society in Nuevo Leon, 1848-1910. Austin: University of Texas Press,

2001. 384 pp. $50 (hardcover), ISBN: 0-292-75252-0; $23.95 (paperback), ISBN:

0-292-75255-5.

Reviewed for EH.NET by Jeremy Baskes, Department of History, Ohio Wesleyan

University.

Historians have long noted that Mexico’s extreme regional diversity makes

generalization impossible. Instead historians have stressed the concept of

“many Mexicos,” each with its own peculiar historical development. Juan

Mora-Torres examines one such “Mexico,” the northern region that became the

state of Nuevo Le?n, and particularly Monterrey, its heavily industrialized

capital.

During the colonial period, Nuevo Le?n was a peripheral territory possessing

little in the way of mineral wealth. Consequently, colonial rulers largely

ignored this frontier region, which was settled by poor peasants. These early

colonists lived in landholding communities that were united in their need to

defend themselves against “barbarian tribes.” These colonists were viewed by

rulers in Mexico City as a vital defense against the largely nomadic indigenous

tribes of the frontier. According to Mora-Torres, defense of the frontier

earned the settlers special rights that included exemption from tribute to the

Spanish Crown, and would endow the local population with what the author calls

a “fronterizo identity” that was distinct from that of Central Mexico.

Furthermore, “class and ethnic hierarchies of colonial Mexico were not

reproduced in Nuevo Le?n, a condition that permitted the development of a more

egalitarian society” (p. 16).

Isolated from the seats of power, the fronterizos enjoyed considerable autonomy

and resisted the weak attempts at centralization pursued by Mexico City after

the colony’s independence in 1821. Texan independence followed by the

Mexican-American War, however, had a profound impact on Nuevo Le?n and marked

the transformation of this region from “frontier” to “border.” After 1848 Nuevo

Le?n ceased to be an isolated frontier and became a critical Mexican region

bordering the rapidly developing U.S. economy. “Northern Mexico became a

permanent zone in which the economies and cultures of two nations that were in

many ways worlds apart engaged each other, creating a unique region different

from the interiors of both Mexico and the United States” (p. 9).

End of isolation, however, did not mean that Nuevo Le?n came immediately under

the authority of Mexico City, which still proved unable to exert much influence

in this border region. Instead, the creation of the border provided new

opportunities to Nuevo Le?n’s “increasingly confident merchant class” (p. 36).

In the decades that followed 1848, Monterrey merchants took advantage of their

location to deal in contraband smuggled in from Texas. Merchants on both sides

of the border were all too happy to evade taxes. In fact, Mora-Torres suggests

that a number of the border towns were founded because of the opportunities

afforded by contraband (p. 33). This prosperity also strengthened the local

caudillo (warlord), Santiago Vidaurri, who dominated the Northeast of Mexico

from 1855 to the end of the French occupation. Vidaurri succeeded in curtailing

contraband and reducing violence at the border even while he centralized power

in his own hands. The Nuevo Le?n economy received a real boost with the U.S.

Civil War. Because of the blockade of U.S. southern ports, much of the South’s

cotton exports were diverted to Mexico and exported through Matamoros.

The author details the process by which Mexico’s modernizing dictator, Porfirio

D?az, (1876-1911) finally “eroded the power of Caudillos and forcibly

integrated the periphery into a centralized political system” (p. 6). D?az’s

1885 appointment of Bernardo Reyes as interim Governor of Nuevo Le?n coincided

with the coming of age of Monterrey, “the sultan of the North.” During the

Porfiriato, D?az’s thirty-five-year dictatorship, Monterrey emerged as the

industrial leader of Mexico. Monterrey was blessed with an ideal location, near

to both the United States and important natural resources in bordering states

of Mexico. As Mexico’s capitalist engine of growth, Monterrey attracted

millions of migrants from the nation’s poorer southern states. According to

Mora-Torres, the ability of Mexican laborers to abandon Nuevo Le?n and migrate

to the “other side,” forced northern capitalists to pay higher wages and adopt

more enlightened employment practices than their southern compatriots. “A labor

market emerged in the northern Mexican states, set apart from the rest of

Mexico by free labor” (p. 127). One of the results was greater productivity in

the industrial sector.

In stark contrast to Monterrey’s free labor regime, landowners in rural Nuevo

Le?n continued to depend on coerced labor, most notably debt peonage, as they

were simply unable to afford the high wages. As such, rural labor practices

more closely resembled the notorious conditions on southern haciendas during

the Porfiriato. Interestingly, however, largely absent in Nuevo Le?n was the

seizure of peasants’ lands that so characterized southern Mexico and which

contributed to the agrarian violence after 1910. The arrival of railroads did

not dispossess the peasants of Nuevo Le?n. Population growth within once viable

communities, however, did impoverish them. “Rural society was more or less

egalitarian: the great majority were poor but had land” (p. 106). Not even the

haciendas of Nuevo Leon fared particularly well during this age of export-led

growth. In contrast to the city of Monterrey, the rural economy stagnated.

Historians of Nuevo Le?n have traditionally emphasized the harmony of class

relations in Monterrey’s industrial sector distinguishing it from other regions

of Mexico. They depict the Porfiriato as a time in which Monterrey’s hard

working industrial class earned good wages from fairly enlightened employers.

Mora-Torres rejects this view arguing that Monterrey workers did have

class-consciousness and did challenge their employers on a number of issues,

such as the preferable treatment afforded to foreign workers or attempts to

reduce bonus pay. Despite this argument, Mora-Torres nonetheless portrays

Monterrey industrialists as more paternalistic than their southern counterparts

are traditionally depicted. Whether out of civic pride or economic necessity,

Monterrey businessmen pursued relatively enlightened employment practices.

The final chapter of this book is an interesting examination of Monterrey’s two

largest companies, the Cuauht?moc Brewery and the Compa??a Fundidora de Fierro

y Acero de Monterrey, the first steel mill in Latin America. The histories of

these two industrial giants differ notably. Cuauht?moc Brewery was established

in 1890 with a fairly small initial investment of 125,000 pesos. By the end of

Porfirio D?az’s rule in 1911, the company was worth five to eight million pesos

and had become “a key symbol of Monterrey’s industrial identity” (p. 236). Part

of the Brewery’s success in this highly competitive industry was attributed to

the fact that it vertically integrated glass production and enjoyed good

labor-management relations. While the government provided a favorable business

climate, the Brewery remained independent of the D?az regime. In contrast to

the Brewery’s small initial investment, the Fundidora steel works was founded

in 1900 with a ten million peso investment made jointly by Monterrey and Mexico

City capitalists. The steel industry was identified by D?az and Mexican

nationalists as an example of “progress” and “a symbol of Mexico’s attempts to

liberate itself from foreign domination of the economy” (p. 264). While the

Fundidora employed the most advanced technologies, it was unable to compete

with imported steel due to the high cost of coal and transportation.

Fortunately for investors, “Mexico’s nascent steel industry was too important

for the image-conscious Porfirian politicians to let it collapse” (p. 263-64).

The government kept the company afloat with lucrative concessions to produce

rails for the increasingly nationalized railway. In addition, the government

provided the company with subsidized loans. Unlike the Cuauht?moc Brewery, the

Fundidora became extremely dependent on the central state. While the author

does not emphasize the issue, the case of the steel works provides significant

evidence that runs contrary to the traditional depiction of the D?az

administration’s obsequiousness to foreign capital. Here D?az pursued an

interventionist policy to promote the nation’s perceived economic interests.

Juan Mora-Torres has written a very good book, which brings together a wealth

of detail on northern Mexico’s political and economic history. This work

reminds historians of Mexico that the experiences of its diverse regions

differed greatly. So much of Mexico’s traditional narrative simply does not

apply to the border region of Nuevo L?on, a region that was as deeply

influenced by events in its northern neighbor as those in Mexico City. As such,

this is a book that should interest U.S. historians as well.

Jeremy Baskes is author of Indians, Merchants and Markets: A

Reinterpretation of the Repartimiento and Spanish-Indian Economic Relations in

Colonial Oaxaca, 1750-1821 (Stanford University Press, 2000).

Subject(s):Urban and Regional History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII

Institutions and Investment: The Political Basis of Industrialization in Mexico before 1911

Author(s):Beatty, Edward
Reviewer(s):Sokoloff, Kenneth L.

Published by EH.NET (June 2002)

Edward Beatty, Institutions and Investment: The Political Basis of

Industrialization in Mexico before 1911. Stanford: Stanford University

Press, 2001. xii + 296 pp. $55.00 (cloth), ISBN: 0-8047-4064-X.

Reviewed for EH.NET by Kenneth L. Sokoloff, Department of Economics, University

of California, Los Angeles.

Between 1877 and the onset of its Revolution in 1910, Mexico was governed by

the regime of Porfirio Diaz. Under Diaz, Mexico enjoyed its longest period of

political stability since the country had gained independence, as well as a

path of early industrialization that involved dramatic expansions of both

mining and manufacturing output. Diaz and his associates were quite effective

at consolidating power and embarked on a program of reforms that effectively

broadened and deepened the role of the national government in the economy. It

has long been recognized that this era marks a key juncture in the development

of the Mexican economy, but scholars have differed in the extent to which they

have credited or blamed the Diaz regime for the various positive and negative

features of what happened, and of what was to happen, to the country. Some have

argued that the policies that were put into place under Diaz provided a

necessary foundation for the evolution of an industrial economy, and they

generally point to the sharp acceleration of growth and structural change

achieved during these decades as support for their view. Others, however,

highlight the close ties between leading figures in the Diaz regime and the

companies that benefited disproportionately from the policies enacted, how the

bulk of the population seems to have realized little if any improvement in

their material welfare during this period, and how the Porfiriato gave way to

the long and bloody Mexican Revolution. Although explicit counterfactuals are

seldom posed, this alternative perspective implicitly questions whether the

policies of the Diaz government were the best that could have been undertaken

for Mexico overall.

In an extremely well written and thoroughly researched monograph, Edward Beatty

explores a subset of the institutional changes put into place under Diaz, with

particular attention to the administration and effects of, as well as the

motivation behind, these policies. Particularly distinctive is his portrayal of

the principal economic policymakers as virtual technocrats who were imbued with

liberal ideas and attempting to implement a coherent and fair-minded strategy

for promoting long-term economic growth in Mexico. In so doing Beatty downplays

the notion that they were unduly influenced by the possibilities that they or

their close relatives and associates could extract private gains from the

authority of their public offices. Although his appraisal is qualified by an

acknowledgement that the economic opportunities created by the Diaz policies

did little for the mass of the population, the general conclusion seems to be

that the institutions were important in fostering the rapid growth of the

Mexican manufacturing sector and in leading a relatively backward economy onto

a path of sustained development. The study focuses on three specific areas of

economic policy: import tariffs; intellectual property institutions; and the

New Industries (Industrias Nuevas) program that provided tax and other

incentives to entrepreneurs who organized firms in industries new to Mexico.

The basic argument is that the Diaz policies were inspired by the vision that

Mexico needed a modern industrial sector in order to realize sustained growth,

and that it was thus socially desirable for the government to take action to

raise the incentives for investment in manufacturing and other industrial

activities. Beatty suggests that the boom in industrial production that got

under way in the mid-1880s and continued through the first decade of the

twentieth century is evidence that these policies, taken as a whole, were

indeed very effective.

The first institutional change Beatty examines is the adoption of a

protectionist pro-industrial tariff policy that occurred during the late-1880s.

He observes that up until then the growth of the Mexican economy had been based

primarily on mining and the expansion of railroads that was intended to support

such extractive industries. Both the volume and the technology of manufacturing

production were rather modest until the 1890s, at which time “investors began

sinking substantial amounts of capital in commercial agriculture as well as in

the domestic manufacture of products that had formerly been imported or

produced by hand.” Drawing on statements offered by the relevant policymakers,

ad valorem tariff schedules, his own meticulous calculations of effective rates

of protection, as well as industry-specific production and foreign trade

series, Beatty argues that the Diaz government understood the basic logic of

the infant-industry rationale for tariffs and opted for a strongly

protectionist tariff policy in order to stimulate higher rates of investment in

manufacturing industries that were thought to have potential for surviving

international competition or be otherwise supportive of long-term growth. He

shows how imports of manufactured goods such as bottled beer and cotton cloth

fell while domestic production of those items rose over the years from 1890 and

1910, and suggests that high tariff protection was largely responsible for this

sort of pattern across a range of manufacturing industries. Although conceding

that a substantial depreciation of the silver-based peso relative to foreign

gold-based currencies that progressed up to 1903 reduced the degree of

protection offered by ad valorem tariffs, he contends that the levels were

still high enough to provide an ample incentive for investment. In short,

Beatty seems to accept the idea that more investment in manufacturing was

better than less (even if the cost was higher prices to consumers), and judges

Diaz’s high-tariff policy — one that became something of a fixture until very

recently in Mexican economic policy — as being extremely effective in

promoting that goal.

Whereas Beatty appears to regard the tariff policies of Diaz as conducive to

growth, he is much more circumspect about a second area of economic policy —

the reform of the patent system that culminated in the new laws of 1890 and

1893. He suggests that the Mexican policymakers were much influenced by the

evident success of the intellectual property institutions of the North Atlantic

economies, and were convinced by the liberal arguments that greater security in

property rights — in this case to technology — meant higher levels of

investment. Noting that a high fraction of the patents that were granted went

to foreigners, however, Beatty raises the possibility that it may not have been

advantageous for a follower country like Mexico to strengthen the property

rights to inventions. If Mexico was primarily an importer of inventions, and

the real cost of transferring technology across the border was low (such that

the new technologies would have diffused to Mexico even without patent

protection), then foreign inventors were the principal, and perhaps the only,

beneficiaries of the new patent system. Indeed, Mexican productivity growth may

well have been hampered by the patent system if its effects were confined to

reducing the rates of technological diffusion and supporting monopolistic

industrial structures.

The third economic policy that Beatty treats is Industrias Nuevas, begun in

1893 to protect infant industries by offering tax and tariff exemptions

(generally for capital good or raw materials, but sometimes for the actual

finished products) to enterprises that were novel to Mexico. Working with the

materials contained in the files of a sample of the individuals and firms that

applied for such subsidies, he demonstrates how the great majority of those who

sought these forms of support for new investment were not able to obtain

approval or carry the project forward (despite their generally having very

impressive connections). Overall, since such a small number of the applications

ultimately led to productive enterprises, Beatty concludes that the program

played only a very small role in Mexico’s early industrialization. Despite its

limited impact, Beatty believes that Industrias Nuevas is representative of

Diaz policies more generally, and for that reason documents the workings of the

bureaucracy administering Industrias Nuevas in some detail. In his view, the

evaluation and oversight revealed in the memoranda and correspondence between

the bureaucracy and the applicants suggest a high degree of professionalism.

Moreover, he argues that the entire program was designed to make the process of

firms applying for government support or subsidies more systematic, and to base

the award of such assistance on a solid economic basis. His clear implication

is that those who label or labeled (as many contemporaries did) the program as

one that was merely engaged in providing privileges to cronies of government

officials have grossly overstated their case. Beatty does acknowledge that

seemingly objective criteria and characteristics of the program, such as the

minimum size of firms and the cost of the application process, appear to have

restricted approval of exemptions to a small minority of highly financed and

well connected firms, but holds nevertheless that the professionalism reflected

in the bureaucratic record and the simple workings of objective economic

advantage do not support claims that the program was corrupt. The policymakers

and administrators, he contends, were trying to implement coherent plans for

the promotion of industrialization. If they were not so successful, it was

because of the enormity of the challenges they faced in the underdeveloped

Mexican context — not because of a lack of commitment or integrity on their

part.

There is no doubt that Beatty is a careful researcher who has written a very

fine book that offers rich and fascinating detail about the crafting and

conduct of economic policy under the Diaz regime. Some scholars may not be

fully persuaded by the account that he offers however. One issue is whether

evidence from bureaucratic memoranda and correspondence are sufficient to prove

that the federal bureaucracy operated in “relative freedom from political

considerations”. A more important concern, at least from my point of view, is

whether his findings sustain the notion that the institutional changes made by

the Diaz regime were a significant contributor to growth. Beatty seems to

presume that inducing more investment in manufacturing was good for growth,

without much discussion of whether this was the best use of Mexico’s scarce

capital resources. Moreover, even he seems skeptical about whether the patent

system reforms and the Industrias Nuevas program had much of a positive impact.

He does argue that the tariff policies of the Diaz regime were important in

promoting investment in manufacturing after 1890, but the direct evidence for

this theoretically well-founded effect is — as he notes — less than

overwhelming. In puzzling over the data he presents, I was instead struck by

the potential explanatory power of the radical depreciation of the silver-based

peso (along with other silver-based currencies) relative to gold-based

currencies that occurred between the mid-1880s and 1903. The steep fall in the

value of the peso (silver) undoubtedly raised the relative price of tradables

— such as manufactures, mineral resources, and certain agricultural outputs —

as compared to non-tradables, and would be expected to have stimulated higher

investments in firms producing tradables (as well as to have hammered producers

of non-tradables). International finance theory thus provides an alternative

explanation for the shifts in investment and output during the late Porfiriato

that Beatty seeks to explain. It may be the case that the institutional changes

made by the Diaz regime were less of a factor in the growth of Mexican

manufacturing (and mining) over this period than world economic conditions.

Despite these caveats, this is a book that all serious students of Latin

American economic history should read. It offers enormous insight and an all

too rare glimpse into the evolution and workings of selected strategic

institutions in Porfirian Mexico.

Kenneth L. Sokoloff received his Ph.D. in Economics from Harvard University in

1982, and is Professor of Economics at the University of California, Los

Angeles and a Research Associate of the National Bureau of Economic Research.

He has published on a wide variety of topics in economic history and

development economics, including: the sources of productivity growth during

early industrialization (in the U.S. and East Asia); long-term change in the

rate and organization of inventive activity; intellectual property institutions

in developing economies; and factor endowments, institutions, and differential

paths of development in the economies of the Americas.

Subject(s):Markets and Institutions
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: Pre WWII