Northern Agriculture After the Civil War

Some what misleading title because there is much that the North and South have in common Substantial Increases in Productivity

Labor Productivity Man hours needed Wheat 100 Bu Corn 100 Bu Cotton 1 bale

Where do increases in productivity come from? Refer back to lecture on Northern Agriculture before Civil War –New Land Reduction in transportation costs increases size of market Railroads –Mechanization –New varieties of plants

Total Factor Productivity Q=L a K b T c TFP=Q/L a K b T c Between 1889 and 1899, TFP increase by.7% per year compared to 1.7% for manufacturing

Increased costs of farming Increase in farm size Increase in capital necessary to start up –Cost of machinery was falling Increase in cost of land Sources of Agrarian Discontent (Populist Movement) Were these concerns justified?

Increase in Tenancy Increase in the percentage of farms operated by tenants –From 1880 to 1920 the percentage of tenant farms increased from 19% to 28% in North 36% to 50% in South Increase in average farm size in North –From 115 acres to 156 for all farms from Concern that “land monopoly” was threatening agricultural ladder

Was the Agricultural Ladder in trouble? No easy answer even looking a aggregate data Increase in farm size in North was larger for tenant farms than owner operated farms From 1900 to 1920 average farm size increased from –125 acres to 169 acres for tenants –136 acres to 152 acres for owners

What is farmer’s goal? farm ownership –Minimize transaction costs income maximization –Tenancy is also a way of increasing farm size and to accumulate capital and land Allows farmer to resources on farm equipment and other capital –Is it better to rent a bigger farm or buy a smaller one?

Increase in Tenancy Tenancy is step on Agricultural ladder but it is also a way of altering farm size. –In the South, owners of large amounts of land rent out parts to sharecroppers and other tenants but still manage the land as one unit –In North some farmers rent land in addition to land owned to make larger farms

Mortgage Market As land becomes more expensive, increased use of mortgages Did banks have monopoly power? –Entry is easy –Low forclosure rate Prices were falling but this should only be a problem if it was unanticipated Interest rates were falling during this period

Railroads Farmers saw themselves victims of railroad monopoly Railroad rates were falling faster than farm prices Railroads were a natural monopoly –High fixed costs –In some cases competition between lines and with water transport. In some cases not.

Natural Monopoly ac D mc mr q1 p1

Problems with unregulated Natural Monopoly Higher price than competitive industry on lines where no competition If there are two railroads will compete and price could be driven down to MC which would eliminate deadweight loss but cause negative profits. Prices tended to be high on short hauls with no competition but lower on land hauls.

Marginal Cost price ac D mc mr q1 p1 q2 p2

Demand for regulation Farmers want equal rates but with the low rates Railroads want equal rates but with high rates (Enforcement of cartel) Increase in demand for regulation leads to Interstate Commerce Commission (ICC) Some evidence that for part of the period it benefited railroads

Railroads Farmers saw themselves victims of railroad monopoly Railroad rates were falling faster than farm prices Why did Populism flourish? Consider this graph taken from your text which shows Crop price/railroad rates

Price Variability Preceding graph shows that crop price is variable (lots of ups and down) Farmers are selling in European market which demand is variable Populism can be explained as a special interest group –Agricultural price supports are part of its legacy William Jennings Bryant famous candidate

Populism, a success? Never got more than 10% of popular vote William Jennings Bryant was their most famous presidential candidate (Cross of Gold) –He actually ran on a democratic party ticket and was endorsed by the populist party Were successful in increasing amount of regulation of RR and other utilities and setting the ground work for agricultural price supports.

Railroads How important were Railroads to increasing US economic growth? –Rostow claimed RR were the cause of takeoff of US economic growth –Lots of company

Problems Problem- No evidence of acceleration in rate of economic growth when we look at GNP or GNP per capita Reduction in transportation costs before railroads with canals and turnpikes

Role of Railroad Most of the expansion takes place after Railroads created external benefits just as canals and turnpikes did Was construction ahead of demand? –Were returns to investors< returns in the next best investment

Fishlow’s analysis show railroads in midwest profitable from beginning Fogel shows much larger social rate of return than private rate of return for Union Pacific –Justifies government subsidies such as land grants –Controversy about whether land grants were necessary

Social Savings of Railroads This is not social rate of return vs private rate of return Social savings is related to the opportunity cost –Difference between transporting goods on railroads and transporting goods on canals adjusting for speed, quality, time water ways are frozen etc –If we just take (Pw-Prr)q of freight shipped it is about $150 to 175 million in 1859 or about 4% of GNP. Would have grown to about 15% of GNP by end of century (Fishlow)

Fogel’s revision Compare cost of transportation with railroads in 1899 to cost of transportation without railroads in –Land under cultivation would change Land more 40 miles from water source would not be cultivate (24% of farmland would not be cultivate) Should use the rental value of the land as the social savings, not the difference in cost of hauling the goods –More canals would be built

Not all goods are agricultural commodities where speed is essential, need to adjust for this Estimate of Social Savings for 1890 is about 7.3 percent of GNP, much less than Fishlows

Points of controversy Fogel does not consider passenger’s time savings Costs vs prices. Both use price and not resource costs. If markets are competitive, rates should adjust so that they are equal. Could additional waterways be built and could existing waterways handle more traffic?

Linkages Backward linkages –Railroads are not large part of demand for iron Forward linkages –Benefits of linking country –Important is not the same as indispensible