Economic Growth before the Civil War Walton and Rockoff Ch 7-8

Overview What happened to economic growth before the Civil War? Agreement after Lots of estimates before 1840 – Census does not collect data on agricultural production until Since most of population is employed in agriculture, estimates before this time are base on limited data.

Walton and Rockoff rely on trade data. Trade data shows that the % trade to Britain and its colonies declines Volume of trade increases, but per capita exports do not change much Lots of disruption to trade International Trade is important but not crucial

Why does trade increase? Removing trade restrictions reduces cost of imports and exports Constitution clarifies trade law Structural change in Textile industry – 1793, Eli Witney invents the cotton gin which reduces the cost of cotton, raw material – Industrial Revolution in Great Britain centers on textile production which increases productivity – leads to increase the demand for cotton grown in US

What about GDP per capita Paul David “The Growth of Real Product in the United States before 1840:New Evidence, Controlled Conjectures,” Journal of Economic History 27 (June 1967) David begins with the statement “Prevailing scholarly opinion evinces disturbing symptoms of latent schizophrenia on the subject of economic growth in antebellum United States.”

David’s estimates David begins with a simple identity that can be estimated with data available Three separate episodes of growth from 1790 to – 1.6 % Per year growth in per capita income, ends with the trade embargo of 1807 and continuing through the War of – mid 1820’s to mid 1830’s-2.5% per year in per capita growth. – 1845 to % per year. – Overall increase of about 50% from 1800 to 1840.

Why does trade increase economic growth ? Comparative advantage- allows the good to be produced by the lowest cost producer Specialization and trade go together Less costly for US to specialize in cotton production and buy cotton cloth from Britain. When trade is disrupted by Napoleonic Wars, Jefferson’s trade embargo and War 1812, rate of growth of US economy declines

Trade Embargo Not all sectors of the economy are hurt Manufacturers in the US gain from the embargo and trade disruptions caused by the War of 1812

Simple model of economic growth Production Possibilities Frontier (PPF) shows the combinations of goods and services which can be produced using the existing technology and existing resources Because resources are scarce, choices must be made between alternatives PPF shows available choices

PPF for economy with lots of producers B W Shows combinations of bread and water which economy could produce with existing resources. Slope of PPF is opportunity cost Lowest cost producers produce first Slope goes from flat to steep Trade allows country to move off PPF

PPF for economy with lots of producers B W More resources (land, labor capital) cause curve to shift. Technological change also shifts curve may change its slope

Accounting for Growth Between , – 49% growth due to growth in Labor – 26% growth due to growth in Capital – 10 % growth due to growth in Land – 15% growth due to growth in Productivity Most of population still in agriculture, so increases in agricultural productivity is most important Why does Land increase?

Western Expansion (more land) Louisiana Purchase of 1803 doubled the size of country More Land Higher Productivity Land – Yield per acre is higher

Land Policy New Questions – Distribution of Public Land How will land be administered? How will sales be organized? – Political organization of new territory Relation to existing states?

Land Distribution-Price Sell land at full market value? – Federalist idea increase revenue to central government Sell land below market value? – Jeffersonian ideal of a nation of small farmers – Small lots, low prices, credit Both systems create opportunities for rent seeking behavior

Set price at profit maximizing level creates rents for existing government – What is market price? – Favors the wealthy and well connected Low price makes land affordable – encourage speculators – What happens when price is set below the market level? – Qd>Qs, rationing of some type is necessary

Original Pattern of settlement New England model-orderly settlement – Townships with carefully surveyed tracts of land – Auctioned to settlers – No one could own land that had not been surveyed Southern model – Settler selects tract and asks surveyor to mark it off

Land Ordinance of 1785 Original states initially claimed territory west to Ohio River, last states relinquished claim in 1784 – Surveyed parcels, public auction (details in nest slide) – Lots of corruption Difficult to enforce rules – Lots of Changing rules – Federal Government never makes much money

Land Survey

Northwest Ordinance of 1787 What is political organization of new territory? – Originally consider part of existing states – Should they become independent states Northwest territory established – Governor and judges appointed by Congress – Established process for area to become states

Other Land Acts Continuing controversy about disposition of land Homestead Act 1862 – Anyone over 21 could have 160 acres of public land if they lived on land or cultivated it for 5 years

Effects of Land Sales Land Policy is successful at distributing land – Most of good land distributed by 1860 – Did not provide a major source of gov revenue How did it effect income distribution? – Land speculation Informational asymmetry Some got rich, some did not – Not clear it had large effects?

Where did people go? Population Distribution by Regions, 1810–1860

Moving Frontier

Why did increase in settlement happen at this time? Were settlers reacting to incentives? – Returns of agricultural investment about the same as other investments (Not higher or lower) Evidence suggests settlers were reacting to economic incentives Close correlation between crop prices and land prices Gold and Silver discovery in West encourages migration

U.S. Public Land Sales and Cotton Prices, 1814–1860*

Why is land settled at this time? Reduction in transport costs – Increased Agricultural productivity because of increase yield of western land – Increased specialization possible with larger markets which effects both agriculture and industrial markets Rule of thumb is transport cost make up no more than 50% of total price- lower the cost allow for farther shipping-