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History of the American Economy
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History of the American Economy ELEVENTH EDITION
G A R Y M . W A L T O N University of California, Davis
H U G H R O C K O F F Rutgers University
History of the American Economy: Eleventh Edition Gary M. Walton and Hugh Rockoff
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Package ISBN-13: 978-0-324-78662-0 Package ISBN-10: 0-324-78662-X Book only ISBN 13: 978-0324-78661-3 Book only ISBN 10: 0-324-78661-1
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In honor of our dissertation advisors, Douglass C. North and Robert W. Fogel, Nobel Laureates in Economics, 1993
L E F T P H O T O : C O U R T E S Y
O F D O U G L A S S
C . N O R T H , W A S H IN
G T O N
U N IV E R S IT Y
IN S T . L O U IS , R IG
H T P H O T O : P E T E R K IA R /C H IC A G O
Douglass C. North Robert W. Fogel
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Brief Contents P R E F A C E
CHAPTER 1 Growth, Welfare, and the American Economy
PART 1 The Colonial Era: 1607–1776
CHAPTER 2 Founding the Colonies
CHAPTER 3 Colonial Economic Activities
CHAPTER 4 The Economic Relations of the Colonies
CHAPTER 5 Economic Progress and Wealth
CHAPTER 6 Three Crises and Revolt
PART 2 The Revolutionary, Early National, and Antebellum Eras: 1776–1860
CHAPTER 7 Hard Realities for a New Nation
CHAPTER 8 Land and the Early Westward Movements
CHAPTER 9 Transportation and Market Growth
CHAPTER 10 Market Expansion and Industry in First Transition
CHAPTER 11 Labor during the Early Industrial Period
CHAPTER 12 Money and Banking in the Developing Economy
CHAPTER 13 The Entrenchment of Slavery and Regional Conflict
PART 3 The Reunification Era: 1860–1920
CHAPTER 14 War, Recovery, and Regional Divergence
CHAPTER 15 Agriculture’s Western Advance
CHAPTER 16 Railroads and Economic Change
CHAPTER 17 Industrial Expansion and Concentration
CHAPTER 18 The Emergence of America’s Labor Consciousness
CHAPTER 19 Money, Prices, and Finance in the Postbellum Era
CHAPTER 20 Commerce at Home and Abroad
PART 4 War, Depression, and War Again: 1914–1946
CHAPTER 21 World War I, 1914–1918
CHAPTER 22 The Roaring Twenties
CHAPTER 23 The Great Depression
CHAPTER 24 The New Deal
CHAPTER 25 World War II
vii
PART 5 The Postwar Era: 1946 to the Present
CHAPTER 26 The Changing Role of the Federal Government
CHAPTER 27 Monetary Policy, Fiscal Policy, and the Business Cycle after World War II
CHAPTER 28 Manufacturing, Productivity, and Labor
CHAPTER 29 Achievements of the Past, Challenges for the Future
Subject Index
Name Index
viii Brief Contents
Contents
P R E F A C E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x i x
C H A P T E R 1
Growth, Welfare, and the American Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Americans 1900–2009 1
A Study with a Purpose 6 Nation Building 6 Policy Analysis for Better Choices 9
Critical Skills for Personal Development 10 The Long Road out of Poverty 11 An Institutional Road Map to Plenty 15
PART 1 The Colonial Era: 1607–1776
C H A P T E R 2
Founding the Colonies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
European Background to the Voyages of Discovery 22 European Roots and Expanding Empires 22
Portugal and the First Discoveries 23
Portugal and Spain: Expanding Empires 24
The Latecomers: Holland, France, and England 26
First British Settlements in North America 27 Perilous Beginnings 27
Early Reforms 29 Bringing in Settlers 30
Demographic Change 34 Underpopulation Despite High Rates of Population Growth 34 Population Growth in British North America 34 The Racial Profile 36 Imperial European Rivalries in North America 39
C H A P T E R 3
Colonial Economic Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Land and Natural Resource Abundance, Labor Scarcity 42
Agriculture and Regional Specializations 44 The Southern Colonies 45 The Middle Colonies 47 New England 48
The Extractive Industries 49 Furs, Forests, and Ores 49 Sea Products 52
ix
The Manufacturing Industries 52 Household Manufacture and Craftshops 52 Mills and Yards 53 Shipbuilding 54
Occupational Groups 56
C H A P T E R 4
The Economic Relations of the Colonies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
English Mercantilism and the Colonies 58 The Early Navigation Acts 59
Exports, Imports, and Markets 60
Overseas Shipping and Trade 61
Intercolonial Commerce 65
Money and Trade 66 Commodity Money 66 Coins, Specie, and Paper Money 67
Trade Deficits with England 69 Interpretations: Money, Debt, and Capital 72
C H A P T E R 5
Economic Progress and Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Growth and Change in the Colonial Economy 75 Productivity Change in Agriculture 76 Productivity Gains in Transportation and Distribution 80
Technological Change and Productivity 83
Speculations on Early Growth Rates 86 Wealth Holdings 86
Per Capita Wealth and Income, 1774 88
The Distribution of Income and Wealth 88
C H A P T E R 6
Three Crises and Revolt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
The Old Colonial Policy 93
The New Colonial Policy and the First Crisis 96
More Changes and the Second Crisis 98
The Third Crisis and Rebellion 99 Support in the Countryside 101 Economic Exploitation Reconsidered 104
PART 2 The Revolutionary, Early National, and Antebellum Eras: 1776–1860
C H A P T E R 7
Hard Realities for a New Nation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
The War and the Economy 110
The Constitution 113
American Independence and Economic Change 115
x Contents
A Quantitative Analysis of Economic Change 117
War, Neutrality, and Economic Resurgence 119
C H A P T E R 8
Land and the Early Westward Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
The Acquisition of the Public Domain 125 Disposing of the Public Domain 127 The Northwest Land Ordinance of 1785 128 The Northwest Ordinance of 1787 129 The Later Land Acts, 1796–1862 130
The Migrations to the West 132 The Northwestern Migration and Hogs, Corn, and Wheat 133 Agricultural Specialization and Regional Dislocation 136
The Southwestern Migration and Cotton 138
The Far Western Migration 141
C H A P T E R 9
Transportation and Market Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
The Antebellum Transportation Revolution 145
The Routes of Western Commerce 147
Steamboats and the Natural Waterways 148 Competition, Productivity, and Endangered Species 150
Public Versus Private Initiative on the Natural Waterways 152
The Canal Era 153
The Iron Horse 156
Roads 158 Turnpikes 159
The Antebellum Interregional Growth Hypothesis 160
Ocean Transport 161
C H A P T E R 1 0
Market Expansion and Industry in First Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Early Changes in U.S. Manufacturing 166 The Decline of Household Production 166 Craftshops and Mills 167 The Emergence of U.S. Factories 168 The Lowell Shops and the Waltham System 168 Iron and Other Factories 170 The Rise of Corporate Organization 171 Leading Industries, 1860 172
Prerequisites to Factory Production 173 Machines and Technology 173 Standardized Interchangeable Parts 174 Continuous Process and Assembly Lines 174 Power and Energy 175 Factor Proportions and Borrowing and Adapting Technology 177
Productivity Advances in Manufactures 178
Protection from Foreign Competition 179
Contents xi
C H A P T E R 1 1
Labor during the Early Industrial Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
The Growth of the Population and the Labor Force 183
The Changing Labor Force Distribution and Composition 184 Factories and Workers 185 The Rhode Island and Waltham Systems 186
The Impact of Immigration 188
The Wages of Male Labor in Manufacturing 189 English–American Wage Gaps 191 Skilled–Unskilled Wage Ratios 192
Growing Inequality of Income 192
The Early Union Movement 195 Legal Setbacks and Gains 195 Organizational Gains 196
Political Gains for Common Working People 197 Suffrage 197 Public Education 198 Debts, Military Service, and Jail 198 The 10-Hour Day 198
C H A P T E R 1 2
Money and Banking in the Developing Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
The American Monetary Unit 201
The Bimetallic Standard 202
Bank Notes as Paper Money 204
The First Bank of the United States 205
The Second Bank of the United States 208
Economic Fluctuations and the Second Bank 212
Experiments in State Banking Controls 215 The Suffolk System and the Safety Fund 215 Free Banking 216 The Forstall System 216
The Economic Consequences of the Gold Rush 217
C H A P T E R 1 3
The Entrenchment of Slavery and Regional Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . 219
African Slavery in the Western Hemisphere 219
First U.S. Constraints on Slavery 220 Northern Emancipation at Bargain Prices 222 The Persistence of Southern Slavery 223
Plantation Efficiency 224
Economic Exploitation 231
Economic Entrenchment and Regional Incomes 232
Political Compromises and Regional Conflict 234
xii Contents
PART 3 The Reunification Era: 1860–1920
C H A P T E R 1 4
War, Recovery, and Regional Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
The Economics of War 242 Trade and Finance Policies South and North 244
The Civil War and Northern Industrialization 246
Economic Retardation in the South 247 Decline in the Deep South 250 The Inequities of War 251
The Legacy of Slavery 252
C H A P T E R 1 5
Agriculture’s Western Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
The Expansion of Land under Cultivation 261
Federal Land Policy 262
The Impact of Federal Land Policy 264
Growth and Change in Agriculture 266 New Areas and Methods of Cultivation 266
Hard Times on the Farm, 1864–1896 268
Agrarian Political Organizations 272 The Grangers 273 The Greenback Movement 274 The Alliances 274 The Populists 274
The Beginnings of Federal Assistance to Agriculture 275 The Department of Agriculture 275 Agricultural Education 275
Natural Resource Conservation: The First Stages 276 Land, Water, and Timber Conservation 277
C H A P T E R 1 6
Railroads and Economic Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
The Transcontinentals 280
Total Construction: Pace and Patterns 282 Productivity Advance and Slowdown 284
Building Ahead of Demand? 285
Land Grants, Financial Assistance, and Private Capital 286
Unscrupulous Financial Practices 287
Government Regulation of the Railroads 288 State Regulation 290 Federal Regulation 291 Capturing the Regulators? 293
Railroads and Economic Growth 293
Contents xiii
C H A P T E R 1 7
Industrial Expansion and Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
Structural Change and Industry Composition 298 New Technologies 300 New Forms and Sources of Energy 304
Mass Production 306
Economies of Scale and Industry Concentration 307 Early Business Combinations 307 Trusts and Holding Companies 308
The Two Phases of the Concentration Movement 309 Phase 1: Horizontal Mergers (1879–1893) 309 Phase 2: The Vertical Mergers (1898–1904) 312
The Sherman Antitrust Act 314 The Supreme Court as Trustbuster 316 The Federal Trade Commission 317
C H A P T E R 1 8
The Emergence of America’s Labor Consciousness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Demographic Change and the Supply of Labor 319 Birth and Death Rates 319 Immigration 321
Immigration: Politics and Economics 322 Foreign Workers and American Labor 323
Gains for Workers in the Postbellum Period 324 Hours and Wages 324 Women 328 Children 329
Unions, Employers, and Conflict, 1860–1914 330 The Unions and the Courts 334
Labor’s Gains and the Unions 335
C H A P T E R 1 9
Money, Prices, and Finance in the Postbellum Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
New Forms of Currency 339 A Dual Banking System 340
Gold, Greenbacks, or Bimetallism? 343 Returning to the Gold Standard after the Civil War 343 The Crime of ’73 347 The Commitment to the Gold Standard 349 The International Gold Standard 351
The Rise of Investment Banking 352
Bank Panics and the Establishment of the Federal Reserve System 354 National Monetary Commission 355 Federal Reserve Act 355
C H A P T E R 2 0
Commerce at Home and Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358
Urbanization 358
Marketing and Selling 359 Wholesaling 359 Retailing 362
xiv Contents
Product Differentiation and Advertising 363
The First Steps toward Consumer Protection 366
Foreign Trade 368 Changing Composition of Exports and Imports 369 Changes in Balance of Trade 370
The Acceptance of Protectionist Doctrines 371
The Income Tax 373
The United States in an Imperialist World 374
PART 4 War, Depression, and War Again: 1914–1946
C H A P T E R 2 1
World War I, 1914–1918 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380
The Origins of the War 380
The United States goes to War 381 Financing the War 382
Replacement of the Market with a Command System 384 The War Industries Board 385 The Food and Fuel Administrations 385
Labor during the War 387
The Costs of the War 390
The Legacies of the War 390 The Postwar Recession 390 The Domestic Legacies 391 The International Legacies: The Treaty of Versailles 392
C H A P T E R 2 2
The Roaring Twenties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
Social Changes in the Aftermath of War 394
New Goods and the Rise of the Middle Class 395 The Automobile 396 Buy Now, Pay Later 397 Prohibition 399
The Labor Force in the Twenties 400 The Paycheck Rises 400 The Unions Decline 400 Immigration Is Restricted 402 America Goes to High School 403
On the Land 404 Economic Distress in Agriculture 404 First Steps toward Farm Subsidies 405
Were the Rich Getting Richer while the Poor Got Poorer? 407
Macroeconomic Policies 407 Fiscal Policy 407 Monetary Policy 408
International Developments 410
The Great Bull Market 411 The Ponzi Scheme 411 The Florida Land Boom 411
Contents xv
The Stock Market Boom 412 Should They Have Seen the Crash Coming? 415
C H A P T E R 2 3
The Great Depression . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418
Dimensions of the Depression 418
Causes of the Great Depression 420 The Stock Market Crash 420 The Banking Crises 424 The Smoot-Hawley Tariff 426
The Role of the Financial Crisis 426 Monetary Effects of the Financial Crises 426 Nonmonetary Effects of the Financial Crisis 428
Why Didn’t the Federal Reserve Save the Banking System? 429
Fiscal Policy in the 1930s 431
Partial Recovery and then a New Downturn 432 The Price of Gold and the Stock of Money 432 Climbing Out of the Abyss 433 The Recession within the Depression 434
Why Did the Depression Last So Long? 434 Perverse Effects of the New Deal? 435 Fiscal and Monetary Policy 435
Can It Happen Again? 436
What Does the Depression Tell Us about Capitalism? 437
C H A P T E R 2 4
The New Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
The First New Deal 440 Relief 440 Recovery 444
Reform of the Financial System 445 A Safety Net for the Banking System 445 Increased Regulation of Securities Markets 446 The End of America’s Commitment to the Gold Standard 446 Centralization of Monetary Power in the Federal Reserve Board 446
Reform of the Agricultural Sector 447
Labor and the New Deal 452 A New Institutional Framework for Labor Markets 452 Why Was Unemployment So High for So Long? 454
The Supreme Court and the New Deal 456
The Second New Deal: The Welfare State 456
The Critics of the New Deal 457
The Legacy of the New Deal 459
C H A P T E R 2 5
World War II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
Mobilizing for War 462 Trade-offs 465 Overwhelming Firepower 466
xvi Contents
Fiscal and Monetary Policy 468
Wage and Price Controls 470 Hidden Price Increases and the Black Market 471 Rationing 472
Wartime Prosperity? 473
Labor during the War 474
Wartime Minority Experiences 476 Rosie the Riveter 476 African Americans 477
Agriculture during the War 479
Demobilization and Reconversion 480 Would the Depression Return? 480 The GI Bill of Rights 480 Birth of the Consumer Society 481
PART 5 The Postwar Era: 1946 to the Present
C H A P T E R 2 6
The Changing Role of the Federal Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486
The Size of Government in the Postwar Era 486 Total Federal Spending 486 Federal Purchases of Goods and Services 486 Federal Employment 489 Winners in the Federal Budget 489
The Liberal Era, 1945–1976: Continued Expansion of Government 490 The “Little New Deal” 491 The New Regulation 493
The Conservative Era: 1976–2000, Deregulation and Reaganomics 495 Deregulation 495 Reaganomics 495
The Cold (and Sometimes Hot) War Against Communism 496
Agriculture 498 The Relative Decline of Agriculture 498 Price Supports and Subsidies 500
The Environment 503 The Conservation Movement 503 The Rise of the Environmental Movement 504
Changing Ideological Tides 506
Wagner’s Law 507
C H A P T E R 2 7
Monetary Policy, Fiscal Policy, and the Business Cycle after World War II . . . . . 510
The Keynesian Era 510 The Korean War and the Treasury-Fed Accord 513 Dwight D. Eisenhower: The Conservative Approach to the Business Cycle 514 John F. Kennedy and Lyndon Johnson: The New Economics 515 Richard M. Nixon: Price Controls and the End of Bretton Woods 516 Jimmy Carter: The Great Inflation Reaches a Climax 519
Was the Economy More Stable During the Keynesian Era than before the Depression? 522
Contents xvii
The Monetarist Era 523 A Monetarist Experiment? 523 Ronald Reagan: Supply-Side Economics 526 From Greenspan to Bernanke at the Federal Reserve 528
C H A P T E R 2 8
Manufacturing, Productivity, and Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533
Gales of Creative Destruction 533 Productivity Growth 537 The Energy Crisis 538
Changes in the Organization of Industry 540 Conglomerate Mergers 540 Hostile Takeovers 541 In Search of Economies of Scale and Scope 542
Antitrust Policy 542
The Rise of the Service Sector 543
The Changing Role of Women in the Labor Force 544 The Gender Gap 546 The Baby Boom 546
Minorities 547 African Americans 548 Native Americans 551
The New Immigration 552
Unions 554
Real Wages 555
C H A P T E R 2 9
Achievements of the Past, Challenges for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . 559
Achievements of the Past 559 Real Incomes Have Grown Rapidly 559 Lagging Regions Have Caught Up 561 Biomedical Measures of Well-Being Show Improvement 562 Education Levels Reached by Americans Have Increased Steadily 566
Challenges for the Future 567 Improving the Distribution of Income 567 Caring for an Aging Population 569 Winning the Race between Technology and Education 570 The Search for a Meaningful Life 570
Prophets of Decline 571
Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593
xviii Contents
Preface
This new edition of History of the American Economy was deemed necessary because of the brisk advance of research in economic history and the rapid changes unfolding in the U.S. and global economies. The struggle of many nations to convert from centrally planned to market-led economies after the collapse of communism, the rapid economic expansion of India and China, and the growing economic integration in Europe invite new perspectives on the historical record of the American economy. Moreover, the terrorist attacks of September 11, 2001, on the World Trade Center and the Pentagon and the subsequent wars in Afghanistan and Iraq have spread a blanket of uncertainty on the future of the United States. The importance of understanding the sources of economic growth and change, the main subject of this book, is greater than ever.
To properly convey the speed of change of American lifestyles and economic well being, chapter 1 begins with a focus on twentieth-century American life, mostly but not entirely economic. The purpose is to show how dramatically different the way we live today is compared with the times of our grandparents and great-grandparents. The remarkable contrasts in living standards, length of life, and how we work and consume from 1900 to 2000 provide a “wake-up call” for the nation on the changes soon to unfold in our lives and in the lives of generations to come. This wake-up call serves a vital pur- pose: preparation for the future. As Professor Deirdre McCloskey admonishes us in her book Second Thoughts, in preparing for the future we best arm ourselves with a good understanding of the past.
Boxed discussions called “New Views” draw explicit analogies between current issues and past experiences—drug prohibition today and alcohol prohibition in the 1920s, and war finance today and war finance in the past, to name two. Economic historians, of course, have always made these connections for their students, but we believe that by drawing at- tention to them in the text, we reinforce the lesson that history has much to teach us about the present, and the perhaps equally important lesson that detailed study of the past is needed to determine both the relevance and the limitations of historical analogies.
We have retained the presentation of material in chronological order, albeit not rigidly. Part One, “The Colonial Era: 1607–1776,” focuses on the legacies of that era and the institutions, policies, economic activities, and growth that brought the colonies to a point at which they could challenge the mother country for their independence. Part Two, “The Revolutionary, Early National, and Antebellum Eras: 1776–1860,” and Part Three, “The Reunification Era: 1860–1920,” each begin with a chapter on the impact of war and its aftermath. The other chapters in these parts follow a parallel sequence of discussion topics—land, agriculture, and natural resources; transportation; product markets and structural change; conditions of labor; and money, banking, and economic fluctuations. Each of these parts, as well as Part Four, “War, Depression, and War Again: 1914– 1946,” closes with a chapter on an issue of special importance to the period: Part One, the causes of the American Revolution; Part Two, slavery; and Part Three, domestic mar- kets and foreign trade. Part Four closes with a discussion of World War II. All the chap- ters have been rewritten to improve the exposition and to incorporate the latest findings. Part Five, “The Postwar Era: 1946 to the Present” moreover, has been extensively revised to reflect the greater clarity with which we can now view the key developments that shaped postwar America.
xix
Throughout the text, the primary subject is economic growth, with an emphasis on institutions and institutional changes, especially markets and the role of government, including monetary and fiscal policy. Three additional themes round out the foundation of the book: the quest for security, international exchange (in goods, services, and people), and demographic forces.
Finally, this edition further develops the pedagogical features used in earlier editions. We provide five basic rules of analysis called “economic reasoning propositions,” in Chapter 1. We repeatedly draw attention in the text to these propositions with explicit text references and a marginal icon for easy reference. A list of historical and economic perspectives precedes each of the five parts of the book, providing a summary of the key characteristics and events that gave distinction to each era. Furthermore, each chapter re- tains a reference list of articles, books, and Web sites that form the basis of the scholar- ship underlying each chapter. Additional sources and suggested readings are available on the Web site. In addition to these pedagogical aids, each chapter begins with a “Chapter Theme” that provides a brief overview and summary of the key lesson objectives and is- sues. In addition to the “New Views” boxed feature described above, we have retained the “Economic Insights” boxes that utilize explicit economic analysis to reveal the power of economic analysis in explaining the past and to show economic forces at work on specific issues raised in the chapters. We have also retained the “Perspectives” boxes that discuss policies and events affecting disadvantaged groups.
We are pleased to introduce an improved technology supplement with this edition: Economic Applications (http://www.cengage.com/sso). This site offers dynamic Web fea- tures: EconNews Online, EconDebate Online, and EconData Online. Organized by perti- nent economic topics, and searchable by topic or feature, these features are easy to integrate into the classroom. EconNews, EconDebate and EconData deepen a student’s understanding of theoretical concepts through hands-on exploration and analysis of the latest economic news stories, policy debates, and data. These features are updated on a regular basis. The Economic Applications Web site is complimentary via an access card included with each new edition of History of the American Economy. Used book buyers can purchase access to the site at http://www.cengage.com/sso.
A Test Bank and Power Point slides accompany the History of the American Economy, 11th edition, and are available to qualified instructors through the Web site (http://www. cengage.com/econmics.walton).
xx Preface
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Acknowledgments
We are especially grateful to the reviewers of this edition: Phil Coelho, Martha L. Olney, David Mitch, Michael R. Haines, Daniel Barbezat, and David Mustard. Farley Grubb, Pa- mela Nickless, and John Wallis were of special help with ideas for the first half of text. Richard England provided a detailed list of comments on and criticisms of the Tenth Edition that was extremely helpful.
This edition, moreover, reflects the contributions of many other individuals who have helped us with this and previous editions. Here we gratefully acknowledge the contribu- tions of Lee Alston, Terry Anderson, Fred Bateman, Diane Betts, Stuart Bruchey, Colleen Callahan, Ann Carlos, Susan Carter, Phil Coelho, Raymond L. Cohn, James Cypher, Paul A. David, Lance Davis, William Dougherty, Richard A. Easterlin, Barry Eichengreen, Stanley Engerman, Dennis Farnsworth, Price Fishback, Robert W. Fogel, Andrew Foshee, Claudia Goldin, Joseph Gowaskie, George Green, Robert Higgs, John A. James, Stewart Lee, Gary D. Libecap, James Mak, Deirdre McCloskey, Russell Menard, Lloyd Mercer, Douglass C. North, Anthony O’Brien, Jeff Owen, Edwin Perkins, Roger L. Ransom, David Rasmussen, Joseph D. Reid Jr., Paul Rhode, Elyce Rotella, Barbara Sands, Don Schaefer, R. L. Sexton, James Shepherd, Mark Siegler, Austin Spencer, Richard H. Steckel, Paul Uselding, Jeffrey Williamson, Richard Winkelman, Gavin Wright, and Mary Yeager. The length of this list (which is by no means complete) reflects the extraordinary enthusiasm and generosity that characterizes the discipline of economic history.
Gary Walton is grateful to the Foundation for Teaching Economics and for the research assistance of Lisa Chang and to his colleagues at the University of California, Davis for advice and encouragement, especially Alan Olmstead, Alan Taylor, Greg Clark, and Peter Lindert.
Hugh Rockoff thanks his colleagues at Rutgers, especially his fellow economic histor- ians Michael Bordo, Carolyn Moehling, and Eugene White. He is greatly indebted to Nuttanan Wichitaksorn for his able research assistance. Hugh owes his largest debt to his wife, Hope Corman, who provided instruction in the subtleties of labor economics and unflagging encouragement for the whole project. Hugh also owes a special debt to his children, Jessica and Steven, who have now reached an age at which they no longer provide a plausible excuse for not finishing the revision on time.
GARY WALTON
HUGH ROCKOFF
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About the Authors
Gary M. Walton became the Founding Dean of the Graduate School of Management at the University of California, Davis in 1981 and is Professor of Economics Emeritus at the University of California, Davis. In addition, he is President of the Foundation for Teaching Economics, where he has designed and administered highly acclaimed economics and leadership programs (domestically and internationally) for high school seniors selected for their leadership potential, as well as for high school teachers.
He credits much of his personal success to his coach at the University of California, Berkeley, the legendary Brutus Hamilton (U.S. Head Coach of Track and Field in the 1952 Olympics), and his success as an economist to his doctoral dissertation advisor, Douglass C. North (1993 Nobel Laureate in Economics).
Hugh Rockoff is Professor of Economics at Rutgers University and a research associate of the National Bureau of Economic Research. He has written extensively on banking and monetary history and wartime price controls. He enjoys teaching economic history to undergraduates, and credits his success as an economist to his doctoral dissertation advi- sor, Robert W. Fogel (1993 Nobel Laureate in Economics).
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C H A P T E R 1 Growth, Welfare, and the American Economy
AMERICANS 1900–2009 When Rutgers and Princeton played the first intercollegiate football game in 1869, it is doubtful any person alive could have foreseen the impact football would have on twenty- first-century American life. From the weekly money and passion fans pour into their fa- vorite teams, to the media hype and parties linked to season-ending bowl games, football is truly big business, both in college and in the pros. And how the game has changed!
By the turn of the twentieth century, some of the land grant colleges of the Midwest were also fielding teams, one of the earliest being the University of Wisconsin–Madison. The Badgers, as they are popularly called today, enjoy a long-standing sports tradition, and thereby provide some historically interesting facts. As shown in Figure 1.1 on page 2, in 1902, UW’s football team was made up of players whose average size was 173 pounds. Most of the athletes played “both sides of the ball,” on offense as well as defense, and substitutions were infrequent. Economists today would say they were short on spe- cialization. By 1929, the average size had increased modestly to 188 pounds, and players were increasingly, though not yet exclusively, specializing on offense or defense. By 2008, the average weight of Wisconsin football players was 238 pounds, and players routinely specialized not just on defense or offense, but by particular positions and by special teams, and sometimes by types of formations. Even more dramatic size changes are re- vealed by comparing the weight of the five largest players. UW’s five biggest players in 1902 averaged 184 pounds, hardly more than the average weight of the whole team. As shown in Figure 1.2 on page 2, in 1929 the five biggest players averaged 199 pounds. By 2008, the five largest offensive players averaged 315 pounds, just shy of a sixty percent jump over 1929.
UW alumni and students have also been big-time basketball enthusiasts, favoring players with speed, shooting and jumping skills, and height. In 1939, the Badgers’ starting five had a considerable range of heights by position just as they do today. Figure 1.3 on page 3 conveys not only the consistent differences among guards, forwards, and centers but also the dramatic gains in height by players at every position taking the court today. The 1999 guards were taller than the 1939 forwards. Indeed, one of the 1999 guards was taller than the 1939 center. Such dramatic height gains are partly a result of the growing college entrance opportunities that exceptionally talented players enjoy today compared with young players long ago. But the height gains also reflect more general increases in average heights for the U.S. population overall, and these gains in turn indicate improve- ments in diet and health.
Changes in average height tell us quite a lot about a society; nations whose people are becoming taller, as they have in Japan over the last 50 years, are becoming richer and eating better. Because of genetic differences among individuals, an individual woman
1
who is short cannot be considered to be poor. Such a conclusion would not be unreason- able, however, especially along with other evidence, for a society of short people. Adult heights reflect the accumulative past nutritional experience during the growing years, the disease environment, health care, as well as genetic factors (which change very slowly). Americans are the heaviest people in the world; the Germans are second. Dutchmen are the world’s tallest, with male adults averaging 6 feet 1 inches. Americans today, with adult males averaging 5 feet 10 inches and 172 pounds, are nearly 2 inches taller than their grandparents. The average height gain of Americans during the twentieth century was a little more than 3 inches. We are richer and eat more and better than Americans did 100 years ago, sometimes to excess, with a third of the population currently mea- sured as obese or overweight.
Another, and arguably even better measure of a society’s vitality and well-being is the length of life of its citizens. Throughout most of history, individuals and societies have fought against early death. The gain in life expectancy at birth from the low 20s to nearly 30 by around 1750 took thousands of years. Since then, life expectancy in advanced countries has jumped to 75, or 150 percent, and in 2002 in the United States it was
0
50
100
150
200
250
Year 1929
188 lbs.
2008
238 lbs.
P o
u n
d s
1902
173 lbs.
FIGURE 1.1 University of Wisconsin Starting Football Players’ Average Weight
Source: Sport Information Office, University of Wisconsin–Madison.
0
50
100
150
200
300
250
1902
184 lbs.
Year 1929
199 lbs.
P o u n d s
2008
315.2 lbs.
FIGURE 1.2 University of Wisconsin Football: Average Weight of Five Largest Players
Source: Sport Information Office, University of Wisconsin–Madison.
2 Chapter 1: Growth, Welfare, and the American Economy
79 years. This phenomenal change is not merely a reflection of decline in infant mortality; as Table 1.1 below shows for the United States, the advances in length of life are spread across all age-groups. As a consequence, in 2007, 302 million people were liv- ing in the United States, up from 76 million in 1900.
The gains in population size and in length of life stem primarily from economic growth, because such growth leads to better diets and cleaner water, to sewage disposal, and other health-enhancing changes. The broadest and most commonly used measures of overall economic performance are the levels and the rise in real gross domestic prod- uct (GDP). The U.S. real GDP increased from $0.5 trillion in 1900 to more than $11.5 trillion in 2007, measured in constant real purchasing power of 2000 dollars. When divided by the population, GDP per capita averaged $4,900 (in 2000 constant dollars) in 1900. In 2007 it was $28,000, almost eight times higher. Average yearly increases of 2 percent, which for any given year appear small, have compounded year after year to realize this sevenfold advance. These gains have not been exclusive to the few, the middle class, or the very rich.
1999 Guard
6'3"
1939
6'8" 6'1"
1939 Guard
6'5"
5'11"5'11"
1999
6'9" 6'2"
1939 1999 Center
6'11" 6'4"
1999 Forward
1939 Forward
1939 1999
FIGURE 1.3 University of Wisconsin Basketball Players’ Heights
Source: Sport Information Office, University of Wisconsin–Madison.
TABLE 1.1 LIFE EXPECTANCY BY AGE IN THE UNITED STATES
AGE 1901 1954 2000 2005
0 49 70 77 77.8
15 62 72 78 78.6
45 70 74 79 80.3
65 77 79 83 83.7
75 82 84 86 86.9
Sources: Data for 1901, U.S. Department of Commerce 1921, 52–53; and data for 1940–1996, National Center for Health Statistics, selected years.
Chapter 1: Growth, Welfare, and the American Economy 3
The rise in material affluence in the United States in this century has been so great that citizens whom the government labels “officially poor” currently have incomes sur- passing those of average middle-class Americans in 1950 and higher than all but the richest Americans (top 5 percent) in 1900. The official poverty income level in the United States is based on the concept of meeting basic needs. The measure starts with a minimum amount of money needed to feed a person properly. This amount is then mul- tiplied by three to meet needs for shelter, clothing, and other essentials. This widely used poverty threshold measure for Americans was about $8,500 at the end of the century, almost exactly one-quarter the income of the average American, but higher than average incomes for most of the rest of the world, and above the world average per capita income.
Despite gains for people labeled “poor” in the United States, the gap between the rich and the poor remains wide. This gap is an important element in drawing conclu- sions about the success or failure of an economic system. It bears on the cohesion, welfare, and security of a society. A useful starting point from which to consider this issue is to view a snapshot of the division of income in the United States. Figure 1.4 shows this distribution in fifths for all U.S. households for 2007. As in other years, a large gap existed between the top fifth and the bottom fifth. In fact, the richest fifth of the population received half the income (49.7 percent), about the amount the remain- ing four-fifths received. The poorest fifth U.S. households received only 3.4 percent of total income in 2007 (not including food stamps, assisted housing, Medicaid, and other such assistance). Figure 1.5 shows changes in average real income received by these five groups since 1966. By the end of the century, the top fifth of the households earned incomes averaging more than 13 times the average incomes of those in the bottom fifth.
In Figure 1.5, the income gap appears to have grown in recent years: The two top lines drift upward, while the lower three remain level. In percentage terms, for example, for 1975 the lowest fifth received 4.2 percent of total income; as noted, in 2001 it was down to 3.5 percent. In 1975 the top group received 43.7 percent but claimed 50.1 per- cent of the total in 2001.
The important question, however, is whether the people in the bottom fifth in 1975 were also in that category in 2001? If all of the people in the top category in 1975 had switched places by 2001 with all the people in the bottom category (the bottom fifth rising to the top fifth by 2001), no change would be observed in the data shown in
Lowest fifth 3.4%
Second fifth 8.7%
Middle fifth 14.8%
Fourth fifth 23.4%
Highest fifth 49.7%
FIGURE 1.4 The American Income Pie by Fifths, 2007
Source: U.S. Census Bureau. “Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, All Races: 1967to 2007” (www.census.gov/hhes/www/income/histinc/ h02AR.html).
4 Chapter 1: Growth, Welfare, and the American Economy
www.census.gov/hhes/www/income/histinc/h02AR.html
www.census.gov/hhes/www/income/histinc/h02AR.html
Figures 1.4 and 1.5. Surely such a switch would be considered a huge change in the dis- tribution of income among people.
The best available data on the movement of people in these classifications come from a study undertaken by the University of Michigan Panel Survey on Income Dynamics covering 1975–1991.The conventional view of widening income disparity suggested by Figures 1.4 and 1.5 stands in sharp contrast to the evidence in Table 1.2. Reading along the bottom line, we find only 5.1 percent of those in the bottom quintile in 1975 were there in 1991; 29 percent had moved into the top fifth. Reading along the top line indi- cates that 0.9 percent of those in the top fifth in 1975 had fallen into the bottom fifth by 1991; 62.5 percent remained in the top category.
Further analysis of the data has shown that the rise in income and upward movement into higher categories were frequently swift. In any given year, many of those identified in the bottom fifth were young and in school. With gains in education and job opportu- nities, many advanced readily into higher rankings.
Another perspective on the economic gains that Americans experienced during the twentieth century comes from looking at the availability, ownership, and use of new goods. Figure 1.6 shows a virtual explosion in the array of goods routinely owned and
0 1965 1970 1975 1980 1985 1990 1995 2000 2005
20000
40000
60000
80000
100000
In co
m e in
2 0 0 3 U
S $
120000
140000
160000 95th percentile 90th percentile 80th percentile 50th percentile 20th percentile 10th percentile
FIGURE 1.5 The Income Gap, 1967–2003
Source: U.S. Census Bureau. “United States Income Distribution 1967-2003” (http://en. wikipedia.org/wiki/Image:United_States_Income_Distribution_1967-2003.svg).
TABLE 1.2 CHANGES AMONG INCOME RANKINGS
INCOME QUINTILE IN 1975 PERCENTAGE IN EACH QUINTILE IN 1991
1ST 2ND 3RD 4T H 5T H
5th (highest) 0.9 2.8 10.2 23.6 62.5
4th 1.9 9.3 18.8 32.6 37.4
3rd (middle) 3.3 19.3 28.3 30.1 19.0
2nd 4.2 23.5 20.3 25.2 26.8
1st (lowest) 5.1 14.6 21.0 30.3 29.0
In 1991, only 5.1 percent who were in the lowest income quintile in 1975 were still there. Of the lowest quintile in 1975, 29 percent had progressed to the top one-fifth by 1991.
Source: Cox and Alm 1995.
Chapter 1: Growth, Welfare, and the American Economy 5
http://en.wikipedia.org/wiki/Image
http://en.wikipedia.org/wiki/Image
used in U.S. homes. Most of the items shown were not even available to the richest Americans alive in 1901.
A STUDY WITH A PURPOSE Nation Building
Why should you study economic history? The best short answer is to better prepare you for the future. Economic history provides you with a clear perspective on the forces of change and a good understanding of the lessons of the past. The study of economic his- tory also provides lessons on nation building and ways to analyze policies and institu- tions that affect the nation as well as you personally.
One hundred years ago, citizens of Great Britain enjoyed the highest standards of liv- ing in the world, and the British Empire was the leading world power. In 1892, the dom- inant European powers upgraded the ranks of their diplomats in Washington, D.C., from ministers to ambassadors, thereby elevating the United States to first-division status among nations. On economic grounds, this upgrading should have occurred much ear- lier, because in 1892, output per capita in the United States was much higher than in France and Germany and not far below that in Great Britain.
In 1950, the United States was the most powerful nation in the world, and Ameri- cans enjoyed standards of living higher, by far, than those of any other people. An- other “super power,” however, was intensely challenging this supremacy. As the cold war unfolded and intensified after World War II, nations became divided into two clusters: communist nations emphasizing command, control, and central planning systems, and free nations emphasizing markets, trade, competition, and limited
FIGURE 1.6 Household Ownership and Use of Products
The past 100 years have brought a virtual explosion in the array of goods Americans routinely enjoy. At the turn of the century, nobody—not even society’s wealthiest—could travel by air, wear comfortable tennis shoes, or even take an aspirin, yet the majority of modern-day Americans regularly do so. From cars to computers to cell phones, our ancestors would gawk at the products almost all Americans take for granted.
100
90
80
70
60
50
40
30
20
10
0 1900 1915 1930 1945 1960 1975 1990 2005
PERCENT OF U.S. HOUSEHOLDS
ELECTRICITY
CONSUMER GOODS USE SPREADS FASTER TODAY
TELEPHONE
AUTO
RADIO
REFRIGERATOR
CLOTHES WASHER
CLOTHES DRYER
MICROWAVE
CELLPHONE
COMPUTER
STOVE
DISHWASHER
AIR-CONDITIONER
COLOR TV
INTERNET
VCR
Sources: Cox and Alm 1997.
6 Chapter 1: Growth, Welfare, and the American Economy
government. This division into clusters was especially apparent in Europe and Asia, and many other nations sat on the sidelines pondering their futures and which system to follow. By all appearances, the Soviet Union displayed levels of economic, techno- logical, and military strength rivaling those of the United States. It launched its space satellite, called Sputnik, in 1957, placing the first vehicle constructed on Earth in space. The cold war ended in 1989, and many satellite nations of the Soviet Union (e.g., East- ern Germany, the former Czechoslovakia, etc.) broke free. By the mid-1990s, the Rus- sian Federation desperately needed aid just to feed its people. The life expectancy of men in Russia plummeted from the low 60s (mid-1980s) to 56 (mid-1990s). The eco- nomic and political collapse of the Soviet Union and the overwhelming relative success of market-driven systems provide another example of the importance of studying eco- nomic history.
Such swings in international power, status, and relative well-being are sobering remin- ders that the present is forever changing and slipping into the past. Are the changes that all of us will see and experience in our lifetimes inevitable, or can destinies be steered? How did we get where we are today?
It is unfortunate that history is often presented in forms that seem irrelevant to our everyday lives. Merely memorizing and recalling dates and places, generals and wars, presidents and legislative acts misdirects our attention to what happened to whom (and when) rather than the more useful focus on how and why events happened. One of the special virtues of the study of economic history is its focus on how and why. It provides us a deeper understanding of how we developed as a nation, how different segments of the population have fared, and what principal policies or compelling forces brought about differential progress (or regress) among regions and people. In short, the study of economic history enriches our intellectual development and provides an essential per- spective on contemporary affairs. It also offers practical analytical guidance on matters of policy. The study of economic history is best suited for those who care about the next 1 to 1,000 years and who want to make the future better than the past.
This is no empty claim. Surely one of the primary reasons students major in econom- ics or American history is to ultimately enhance the operation and performance of the American economy and to gain personally. Certainly instructors hope their students will be better-informed citizens and more productive businesspeople, politicians, and professionals. “If this is so,” as Gavin Wright recently properly chastised his economic colleagues,
if the whole operation has something to do with improving the performance of the U.S. economy, then it is perfectly scandalous that the majority of economics students complete their studies with no knowledge whatsoever about how the United States be- came the leading economy in the world, as of the first half of the twentieth century. What sort of doctor would diagnose and prescribe without taking a medical history? (1986, 81)
Too often, students are victims of economics textbooks that convey no information on the rise and development of the U.S. economy. Rather, textbooks convey the status quo of American preeminence as if it just happened, as if there were no puzzle to it, as if growth were more or less an automatic, year-by-year, self-sustained process. Authors of such textbooks need an eye-opening sabbatical in Greece, Russia, or Zimbabwe.
Economic history is a longitudinal study but not so long and slow as, say, geology, in which only imperceptible changes occur in one’s lifetime. In contrast, the pace of modern economic change is fast and accelerating in many dimensions. Within living memory of most Americans, nations have risen from minor economic significance to world promi- nence (Hong Kong, China; Japan; the Republic of Korea) while others have fallen from
Chapter 1: Growth, Welfare, and the American Economy 7
first-position powers to stagnation (Russia in the 1990s and Argentina after 2002).Whole new systems of international economic trade and payments have been developed (the North American Free Trade Agreement, European Union). New institutions, regulations, and laws (1990 Clean Air Act, 1996 Welfare Reform Act) have swiftly emerged; these sometimes expand and sometimes constrain our range of economic choices.
The role of government in the economy is vastly different from what it was only 60 or 70 years ago; undoubtedly, it will be strikingly different 50 years from now. The study of economic history stresses the role of institutional change, how certain groups brought about economic change, and why. The study of history, then, is more than an activity to amuse us or sharpen our wits. History is a vast body of information essential to mak- ing public policy decisions. Indeed, history is the testing grounds for the economic the- ory and principles taught in economics classes, as well as for the theories taught in other subjects.
To simplify the vast range of economic theory, we rely primarily on five Economic Reasoning Propositions, as given in Economic Insight 1.1. These Economic Reason- ing Propositions can be summarized for referral purposes throughout the text, as follows:
1. Choices matter. 2. Costs matter. 3. Incentives matter. 4. Institutions matter. 5. Evidence matters.
ECONOMIC INSIGHT 1.1
FIVE PROPOSITIONS FOR ECONOMIC
REASONING
As John M. Keynes has said,
[E]conomics does not furnish a body of settled con- clusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.
This “apparatus of the mind,” or economic way of thinking, follows logically from five basic propositions of human nature and well-accepted truths.
1. People choose, and individual choices are the source of social outcomes. Scarcity compels us to compete in some form and it necessitates choice. People make choices based on their perceptions of the expected costs and benefits of alternatives. Choices involve risk; outcomes cannot be guaranteed because the conse- quences of choices lie in the future.
2. Choices impose costs. People incur costs when making decisions. Choices involve trade-offs
among alternatives. People weigh marginal gains against marginal sacrifices. Ultimately, the cost of any decision is the next-best alternative that must be forgone. Reasoned decision making leads to an increase in any activity in which expected benefits exceed expected costs, and a decrease in any ac- tivity in which expected costs exceed expected benefits.
3. Incentives matter. Incentives are rewards that en- courage people to act. Disincentives discourage actions. People respond to incentives in predict- able ways; when incentives change, behavior changes in predictable ways.
4. Institutions matter, and the “rules of the game” influence choices. Laws, customs, moral principles, ideas, and cultural institutions influence individ- ual choices and shape the economic system.
5. Understanding based on knowledge and evidence imparts value to opinions. The value of an opin- ion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic under- standing, not end it.
8 Chapter 1: Growth, Welfare, and the American Economy
Next time you are in a discussion or argument, recall Economic Reasoning Proposi- tion 5. Evidence comes from history and tests the soundness of an opinion. An opinion is a good way to start a discussion, but it should not end one.
As Economic Reasoning Proposition 5 (evidence matters) emphasizes, not all opi- nions are equal, not when we want to understand how and why things happen. Two of the great advantages of economic history are its quantitative features and use of eco- nomic theory to give useful organization to historical facts. In combination, use of theory and evidence enhances our ability to test (refute or support) particular propositions and recommendations. This helps us choose among opinions that differ.
Policy Analysis for Better Choices
Consider, for instance, the run up of prices in early 2008, especially in gas and oil and food stuffs; additionally, prices on an average basket of goods purchased increased by nearly 4 percent in the United States and by 5.5 percent for the global economy. Such rates harken back to the 1970s. How could we assess a recommendation for mandatory wage and price controls as a means to combat inflation? Figure 1.7 traces a decade of inflation and reveals our experience with wage and price controls during the Nixon years. President Nixon’s opinion at the time was that the controls would benefit the economy.
As shown in Figure 1.7, Nixon’s controls (a choice made within his administration) were imposed in August 1971, when the inflation rate was 3.5 percent. The precontrol peak rate of inflation was 6 percent in early 1970 and was actually falling at the time controls were imposed. The rate of inflation continued to drift downward and remained around 3 percent throughout 1972; it started to rise in 1973, and by the time the controls were completely lifted in early 1974, the rate was 10 percent and rising.
On the face of it, controls did little to stop inflation. But what explains this dismal record? Were the controls themselves to blame, or were other factors responsible? Only a careful study of the period can identify the role of controls in the acceleration of infla- tion. A contrast between Nixon’s price controls and those imposed during the Korean War (which were not followed by a price explosion after controls were lifted) suggests two important things to look at: monetary and fiscal policies.
Price controls, moreover, disrupted the smooth functioning of the economic system. For example, to circumvent the Nixon controls, the U.S. lumber industry regularly
C h a n g e in
P ri ce
s (p
e rc
e n t)
FIGURE 1.7 Inflation and Nixon’s Price Controls
Source: U.S. Department of Commerce 1978, 483.
Chapter 1: Growth, Welfare, and the American Economy 9
exported lumber to Canada and then reimported it for sale at higher prices. (Refer to Economic Reasoning Proposition 4: institutions [rules] matter.) As fertilizers and chemi- cal pesticides became more profitable to sell abroad than at home, agricultural produc- tion suffered for want of these essential inputs. (Recall Economic Reasoning Proposition 3: incentives matter.) These and many other similar disruptions to production decreased the growth rate of goods and services and, therefore, the inflation was worse than it oth- erwise would have been. We cannot explore this issue in depth here. Our point is simply that to evaluate policy proposals, we must inevitably turn to the historical record.1
The use of wage and price controls during World War II provides another example adding to our understanding of their effectiveness. One important lesson this episode teaches is the need to supplement quantitative studies with historical research. An econ- omist cannot naively assume that price statistics always tell the truth. During the war, controls were evaded in numerous ways that were only partly reflected in the official numbers despite valiant efforts by the Bureau of Labor Statistics. One form of evasion was quality deterioration. Fat was added to hamburger, candy bars were made smaller and had inferior ingredients substituted, coarser fabrics were used in making clothes, maintenance on rental properties was reduced, and so on. Sometimes whole lines of low-markup, low-quality merchandise were eliminated, forcing even poor consumers to trade up to high-markup, high-quality lines or go without any new items. And, of course, black markets developed, similar to current ones in controlled substances, such as mari- juana, have done. The job of the economic historian is to assess the overall effect of these activities.2
CRITICAL SKILLS FOR PERSONAL DEVELOPMENT Granted that economic history is important to the professional economist or economic policy maker, but is there any practical reason for studying it if a student has other long- term goals? The answer is yes. See Black, Sanders, and Taylor (2003), who show that undergrad economics majors do better financially than do business, math, or physics majors. The skills developed in studying economic history—critically analyzing the eco- nomic record, drawing conclusions from it based on economic theory, and writing up the results in clear English—are valuable skills in many lines of everyday work. The at- torney who reviews banking statutes to determine the intent of the law, the investment banker who studies past stock market crashes to find clues on how to foretell a possible crash, and the owner-operator of a small business who thinks about what happened to other small businesses that were sold to larger firms are all taking on the role of eco- nomic historian. It will help them if they can do it well.3
Besides the importance of historical study for its vital role in deliberating private and public policy recommendations, knowledge of history has other merits. For one thing, history can be fun—especially as we grow older and try to recapture parts of our lives in nostalgic reminiscence. For another, history entertains as well as enriches our self- consciousness, and, often, because of television, the historical account is provided almost instantly (e.g., news coverage of the 2003 war in Iraq). A sense of history is really a sense
1An attempt to compare and contrast American experiences with wage and price controls is presented in Rockoff (1984). 2For one exploration of this issue, see Rockoff (1978). 3For further insights into the gains of studying economic history, see McCloskey (1976).
10 Chapter 1: Growth, Welfare, and the American Economy
of participation in high drama—a sense of having a part in the great flow of events that links us with people of earlier times and with those yet to be born.
We conclude this section with the reminder that two of the principal tasks of eco- nomic historians are to examine a society’s overall economic growth (or stagnation or decline) and to find out what happens to the welfare of groups within the society as eco- nomic change occurs. Our primary purpose in the following pages is to explain how the American economy grew and changed to fit into an evolving world economy. We study the past to better understand the causes of economic change today and to learn how standards of living can be affected by policies and other forces stemming from techno- logical, demographical, and institutional change.4
The Long Road out of Poverty
Before diving into the chronology of American economic history emphasizing the forces of economic growth, it is essential to place the present-day circumstances of Americans and others in proper historical perspective. As Winston Churchill is credited with saying, “The longer back you look, the farther into the future you can see” (1956). However, we rarely see the distant past clearly, let alone the future.
Reflecting on some historical episode—perhaps from the Bible, or Shakespeare, or some Hollywood epic—is an interesting exercise. For most of us, the stories we recall are about great people, or great episodes, tales of love, war, religion, and other dramas of the human experience. Kings, heroes, or religious leaders in castles, palaces, or cathe- drals—engaging armies in battles, or discovering inventions or new worlds—readily come to mind, often glorifying the past.5
To be sure, there were so-called golden ages, as in Ancient Greece and during the Roman Era, the Sung Dynasty (in China), and other periods and places in which small fractions of societies rose above levels of meager subsistence and lived in reasonable comfort, and still smaller fractions lived in splendor. But such periods of improvement were never sustained.6 Taking the long view, and judging the lives of almost all of our distant ancestors, their reality was one of almost utter wretchedness. Except for the for- tunate few, humans everywhere lived in abysmal squalor. To capture the magnitude of this deprivation and sheer length of the road out of poverty, consider this time capsule summary of human’s history from Douglass C. North’s 1993 Nobel address:
Let us represent the human experience to date as a 24-hour clock in which the begin- ning consists of the time (apparently in Africa between 4 and 5 million years ago) when humans became separate from other primates. Then the beginning of so-called civiliza- tion occurs with the development of agriculture and permanent settlement in about 8000 B.C. in the Fertile Crescent—in the last 3 of 4 minutes of the clock [emphasis added]. For the other 23 hours and 56 or 57 minutes, humans remained hunters and gatherers, and while population grew, it did so at a very slow pace. Now if we make a new 24-hour clock for the time of civilization—the 10,000 years from development of agriculture to the present—the pace of change appears to be very slow for the first 12 hours.…Historical demographers speculate that the rate of population growth may have doubled as compared to the previous era but still was very slow. The pace of change accelerates in the past 5,000 years with the rise and then decline of economies
4For examples of institutional change, see Alston (1994) and Siniecki (1996). 5Such glorification has a long tradition: “The humour of blaming the present, and admiring the past, is strongly rooted in human nature, and has an influence even on persons endued with the profoundest judg- ment and most extensive learning” from Hume (1742/1987, 464). 6For example, see Churchill’s (1956) description of life in Britain during and after the Roman era.
Chapter 1: Growth, Welfare, and the American Economy 11
and civilization. Population may have grown from about 300 million at the time of Christ to about 800 million by 1750—a substantial acceleration as compared to earlier rates of growth. The last 250 years—just 35 minutes on our new 24-hour clock [emphasis added]—are the era of modern economic growth, accompanied by a popula- tion explosion that now puts world population in excess of 6.8 billion (2008). If we focus on the last 250 years, we see that growth was largely restricted to Western Europe and the overseas extensions of Britain for 200 of those 250 years. (North 1994, 364–365)
Evidence supporting North’s observation that 1750 was a major turning point in the human existence is provided in Figure 1.8.
This graph of the world population over the past 11,000 years, along with noteworthy inventions, discoveries, and events, conveys its literal explosion in the mid-eighteenth century. Just a few decades before the United States won its independence from Britain, the geographic line bolts upward like a rocket, powering past 6 billion humans alive. The advances in food production from new technologies, commonly labeled the second Agri- cultural Revolution, and from the utilization of new resources (e.g., land in the New World) coincide with this population explosion. Also noteworthy is the intense accelera- tion in the pace of change in vital discoveries. Before 1600, centuries elapsed between them. Improvements in and the spread of the use of the plow, for example, first intro- duced in the Mesopotamian Valley around 4000 B.C., changed very little until around 1000 A.D. Contrast this with air travel. The Wright brothers were responsible for the first successful motor-driven flight, in 1903. In 1969, a mere 66 years later, Neil Armstrong became the first human to step foot on the moon. In short, the speed of life’s changes.
−9000 −6000 −5000 −4000 −3000 −2000 −1000 0 Time (years)
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Genome Project PCs
Man on moon Nuclear energy
High-speed computers Discovery of DNA
War on malaria Penicillin
Invention of airplane Invention of automobile
Invention of telephone electrification Germ theory
Beginning of railroads Invention of Watt engine
Beginning of Industrial Revolution Beginning of 2d Agricultural Revolution
Discovery of New World Black Plague
FIGURE 1.8 World Population and Major Inventions and Advances in Knowledge
Source: Fogel 1999.
12 Chapter 1: Growth, Welfare, and the American Economy
which many of us take for granted, has been accelerating, especially in the last two and a half centuries.
Before 1750, chronic hunger, malnutrition, disease, illness, and resulting early death were the norm for almost all people everywhere. Even wealthy people ate poorly; as No- bel Laureate Robert Fogel reports:
Even the English peerage, with all its wealth, had a diet during the sixteenth and seven- teenth centuries that was deleterious to health. Although abundant in calories and pro- teins, aristocratic diets were deficient in some nutrients and included large quantities of toxic substances, especially alcoholic beverages and salt. (Fogel 1986)
Exceedingly poor diets and chronic malnutrition were the norm because of the absence of choices, or the fact of scarcity. Food production seldom rose above basic life-sustaining levels. People were caught in a food trap: Meager yields severely limited energy for all kinds of pursuits, including production. Inadequate diets were accompa- nied by high rates of disease and low rates of resistance to them.
The maladies of malnourishment and widespread disease are revealed in evidence re- garding height and weight. As late as 1750, the average height of adult males in England, the world’s most economically advanced nation, was about 5 feet 5 inches, and shorter in France and Norway (Fogel 2004, 13). The average U.S. man today stands 5 inches taller. In the 1750s, typical weight was 130 pounds for an Englishman and 110 pounds for a Frenchman. Compare this with the weight of U.S. males today at about 190 pounds. It is startling to see the suits of armor in the Tower of London that were worn for ancient wars; they vividly remind us of how small even the supposedly largest people of long-ago really were.
The second Agricultural Revolution, beginning in the mid-eighteenth century, soon followed by the Industrial Revolution (first in England, then France, the United States and other Western countries), initiated and sustained the population explosion, lifting birth rates and lowering death rates. Table 1.3 summarizes research findings on life ex- pectancy at birth for various nations, places, and times. From this and other empirical evidence we find that for the world as a whole, the gain in life expectancy at birth took thousands of years to rise from the low 20s to approximately 30 around 1750 (Preston 1995). Nations of Western Europe led the breakaway from early death and the way out of the malnutrition, poor diet, chronic disease, and low human energy of the past. Data in Table 1.3 for example, indicate that by 1800, life expectancy in France was just 30 years, and in the United Kingdom about 36. By comparison, India’s rate was still un- der 25 years in the first decade of the twentieth century, and China’s ranged between 25 and 35 two decades later. By 1950, life expectancy in the United Kingdom and France
TABLE 1.3 YEARS OF LIFE EXPECTANCY AT BIRTH
PLACE MIDDLE AGES SELECT YEARS 1950–1955 1975–1980 2002
France 30 (1800) 66 74 79
United Kingdom
20–30 36 (1799–1803) 69 73 78
India 25 (1901–1911) 39 53 64
China 25–35 (1929–1931) 41 65 71
Africa 38 48 51
World 20–30 46 60 67
Sources: Lee and Feng 1999; Wrigley and Schofield 1981; World Resources Institute; and United Nations Development Program 1999.
Chapter 1: Growth, Welfare, and the American Economy 13
was in the high 60s, while in India and China it was 39 and 41, respectively, comparable to rates in other low-income, developing countries.
In the period before 1750, children and infants, in particular, experienced high death rates globally. At least 20 to 25 percent of babies died before their first birthday. By 1800, infant mortality in France, the United States, and probably England had broken through the 20 percent level, comparable to rates that prevailed in China and India and other low-income, developing nations in 1950. For Europe, the United States, and other ad- vanced economies, this rate is currently below 1 percent, but that rate is 4 percent in China, 6 percent in India, and 9 percent in Africa (Maddison 2007).
To provide another long-term perspective on the escape from poverty, Tables 1.4 and 1.5 provide evidence, albeit inexact, on real income per person, for various periods. Eur- ope led the gradual rise of real income over a 1,000-year period. By 1700, it had risen
TABLE 1.4 REAL GROSS DOMESTIC PRODUCT PER CAPITA
(1990 DOLLARS)
AREA 1000 1500 1700 1820 1900 1950 2003
Western Europe $427 $772 $997 $1,202 $2,892 $5,513 $19,912
USA 527 1,257 4,091 9,561 29,037
India 550 533 599 619 2,160
China 450 600 600 600 545 439 4,609
Africa 425 414 421 420 601 893 1,549
World 450 566 615 667 1,262 2,114 6,477
Source: Maddison 1995, 23, 24; 2007. http://www.ggdc.net/maddison/.
TABLE 1.5 GDP PER CAPITA FOR 56 COUNTRIES IN 1990 DOLLARS
1820 1870 1900 1950 1973 2003
Western European Countries
Austria $1,218 $1,863 $2,882 $3,706 $11,235 $21,232
Belgium 1,319 2,692 3,731 5,462 12,170 21,205
Denmark 1,274 2,003 3,017 6,943 13,945 23,133
Finland 781 1,140 1,668 4,253 11,085 20,511
France 1,135 1,876 2,876 5,271 13,114 21,861
Germany 1,077 1,839 2,985 3,881 11,966 19,144
Italy 1,117 1,499 1,785 3,502 10,634 19,150
Netherlands 1,838 2,757 3,424 5,996 13,081 21,479
Norway 801 1,360 1,877 5,430 11,324 26,033
Sweden 1,198 1,662 2,561 6,739 13,494 21,555
Switzerland 1,090 2,102 3,833 9,064 18,204 22,242
United Kingdom 1,706 3,190 4,492 6,939 12,025 21,310
Western Offshoots
Australia 518 3,273 4,013 7,412 12,878 23,287
New Zealand 400 3,100 4,298 8,456 12,424 17,564
Canada 904 1,695 2,911 7,291 13,838 23,236
United States 1,257 2,445 4,091 9,561 16,689 29,037
(continued)
14 Chapter 1: Growth, Welfare, and the American Economy
http://www.ggdc.net/maddison/
above the lower level of per capita income it had shared with China (the most advanced empire/region around 1000 A.D.). While the rest of the world slept and remained mostly unchanged economically, Europe continued to advance. By the early 1800s, the United States had pushed ahead of Europe, and by the mid-1900s, U.S. citizens enjoyed incomes well above those of people residing in Europe and many multiples above those of people living elsewhere. One thousand years ago, even just 500 years ago, Europe and the rest of the world lived at levels of income similar to today’s poorest nations: the Democratic Republic of Congo (formerly Zaire), Ethiopia, Tanzania, Myanmar (formerly Burma), and Bangladesh (see Table 1.5).
An Institutional Road Map to Plenty
From the preceding per capita income estimates, other evidence, and North’s fascinating time capsule summary of human existence, the road out of poverty clearly is new. Few societies have traveled it: Western Europe, the United States, Canada, Australia, and New Zealand (Britain’s offshoots), Japan, Hong Kong (China), Singapore, and a few others. What steps did Western Europe and Britain’s offshoots take to lead humanity along the road to plenty? Why is China, the world’s most populous country (more than 1.3 billion), now far ahead of India (second with 1.1 billion) when merely 50 years ago both nations were about equal in per capita income and more impoverished than most poor African nations today? Is there a road map leading to a life of plenty, a set of poli- cies and institutional arrangements that nations can adopt to replicate the success of the United States, Europe, and other advanced economies? An honest answer to this ques- tion is disappointing. Economic development organizations such as the International Monetary Fund and the World Bank, as well as countless scholars who have committed their professional lives to the study of economic growth and development are fully aware of the limited theoretical structure yet pieced together.
The fact is well known that a nation’s total output is fundamentally determined (and constrained) by its total inputs—its natural resources, labor force, stock of capital,
Selected Asian Countries
China 600 530 545 439 838 4,609
India 533 533 599 619 853 2,160
Bangladesh 540 497 939
Burma 504 504 396 628 1,896
Pakistan 643 954 1,881
Selected African Countries
Côte d’Ivoire 1,041 1,899 1,230
Egypt 475 649 910 1,294 3,034
Eritrea & Ethiopia 390 630 595
Ghana 439 1,122 1,397 1,360
Kenya 651 970 998
Nigeria 753 1,388 1,349
Tanzania 424 593 610
Zaire 570 819 212
Source: Maddison 1995, 23, 24; 2007. http://www.ggdc.net/maddison/.
TABLE 1.5 CONTINUED
1820 1870 1900 1950 1973 2003
Chapter 1: Growth, Welfare, and the American Economy 15
http://www.ggdc.net/maddison/
entrepreneurial talents—and by the productivity of its inputs, measured as the output or service produced by a worker (or unit of capital, or acre of land, etc.). To measure stan- dards of living, however, we rely on output (or income) per capita, rather than total out- put. For changes in income per capita, productivity advance dominates the story. For example, if a nation’s population increases by 10 percent, and the labor force and other inputs also increase by 10 percent, output per capita remains essentially unchanged unless productivity increases. Most people (80 to 90 percent of the labor force) every- where 250 years ago were engaged in agriculture, with much of it being subsistence, self-sufficient, noncommercial farming. Today that proportion is less than 5 percent in most advanced economies (3 percent in the United States). During this transition, people grew bigger, ate more, and worked less (and lived in more comfort). The sources of pro- ductivity advance that have raised output per farmer (and per acre) and allowed sons and daughters of farming people to move into other (commercial) employments and careers and into cities include advances or improvements in the following:
1. Technology (knowledge) 2. Specialization and division of labor 3. Economies of scale 4. Organization and resource allocation 5. Human capital (education and health)
These determinants are especially useful when analyzing a single nation’s rate and sources of economic growth; however, they are less satisfactory for explaining the rea- sons that productivity advances and resource reallocations have been so apparent and successful in some parts of the world but not in others.
To explain why some nations grow faster than others, we need to examine the ways nations apply and adapt these sources of productivity change. To use this perspective, we need to assess the complex relationships of a society’s rules, customs, and laws (the institutions) and its economic performance. For clarification, consider just one source of productivity change, technology. A new technology can introduce an entirely new product or service such as the airplane (and faster travel) or a better product such as a 2009 BMW automobile compared with a 1930 Model A Ford. A new technology can also lead to new materials, such as aluminum, that affect the cost of production. Alu- minum provided a relatively light but strong material for construction of buildings and equipment.
In short, technological changes can be thought of as advances in knowledge that raise (improve) output or lower costs. They often encompass both invention and modifications of new discoveries, called innovation. Both require basic scientific research, trial and error, and then further study to adapt and modify the initial discoveries to put them to practical use. The inventor or company pursuing research bears substantial risk and cost, including the possibility of failure and no commercial gain. How are scientists, inventors, businesses, and others encouraged to pursue high-cost, high-risk research ventures? How are these ventures coordinated and moved along the discovery-adaptation-improvement path into commercially useful applications for our personal welfare?
This is how laws and rules—or institutions as we call them—help us better under- stand the causes of technological change. Institutions provide a society’s incentive frame- work (Economic Reasoning Proposition 3: incentives matter), including the incentives to invent and innovate. Patent laws, first introduced in 1789 in the U.S. Constitution, pro- vided property rights and exclusive ownership to inventors for their patented inventions. This path-breaking law spurred creative and inventive activity, albeit not immediately. Importantly, this exclusive ownership right includes the right to sell it, usually to people specialized in finding commercial uses of new inventions. The keys here are the laws and
16 Chapter 1: Growth, Welfare, and the American Economy
rules—the institutions that generate dynamic forces for progress in some societies and stifle creativity and enterprise in others. In advanced economies, laws provide positive incentives to spur enterprise and help forge markets using commercial legal and property right systems that allow new scientific breakthroughs (technologies) to realize their full commercial-social potential. Much more could be added to describe in detail the evolv- ing and intricate connections among universities, other scientific research institutions, corporations, and various business entities (and lawyers and courts), all of which form interrelated markets of production and exchange, hastening technological advances (see Rosenberg and Birdzell, Jr. 1986).
Developing and sustaining institutional changes that realize gains for society as a whole are fundamental to the story of growth. The ideologies and rules of the game that form and enforce contracts (in exchange), protect and set limits on the use of prop- erty, and influence people’s incentives in work, creativity, and exchange are vital areas of analysis. These are the key components paving the road out of poverty.
Examining the successful economies of Europe, North America, and Asia suggests a partial list of the institutional determinants that allow modern economies to flourish:
• The rule of law, coupled with limited government and open political participation • Rights to private property that are clearly defined and consistently enforced • Open, competitive markets with the freedom of entry and exit, widespread access to
capital and information, low transaction costs, mobile resource inputs, and reliable contract enforcement
• An atmosphere of individual freedom in which education and health are accessible and valued
North admonishes that, “it is adaptive rather than allocative efficiency which is the key to long-term growth” (1994). The ability or inability to access, adapt, and apply new technologies and the other sources of productivity advances points directly to a so- ciety’s institutions. Institutional change often comes slowly (customs, values, laws, and constitutions evolve), and established power centers sometimes deter and delay changes conducive to economic progress. How accepting is a society to risk and change when outcomes of actions create losers as well as winners (Schumpeter 1934)?
In the following pages, we retrace the history of the American economy, not simply by updating and recounting old facts and figures, but also by emphasizing the forging of institutions (customs, values, laws, and the Constitution). The end of the cold war and the growing body of knowledge about the importance of institutions to economic prog- ress give solid reasons for recasting the historical record and bearing witness to the strengths and shortcomings of an emerging democracy operating within the discipline of markets constrained by laws and other institutions.
SELECTED REFERENCES AND SUGGESTED READINGS Alston, Lee J. “Institutions and Markets in History: Les-
sons for Central and Eastern Europe.” In Economic Transformation in East and Central Europe: Legacies from the Past and Policies for the Future, ed. David F. Good, 43–59. New York: Routledge, 1994.
Avery, Dennis. “The World’s Rising Food Productivity.” In The State of Humanity, ed. Julian L. Simon, 379–393. Boston: Basil Blackwell, 1995.
Black, Dan A., Seth Sanders, and Lowell Taylor. “The Economic Reward for Studying Economics.” Eco- nomic Inquiry 41, no. 3 (July 2003): 365–377.
Blank, Rebecca M. “Trends in Poverty in the United States.” In The State of Humanity, ed. Julian L. Simon, 231–240. Boston: Basil Blackwell, 1995.
Churchill, Winston S. A History of the English Speaking People. Vols. 1–4. New York: Dorset Press, 1956.
Chapter 1: Growth, Welfare, and the American Economy 17
Cox, W. Michael, and Richard Alm. “By Our Own Bootstraps: Economic Opportunity and the Dynam- ics of Income Distribution.” Dallas: Federal Reserve Bank of Dallas, 1995.
______. “Time Well Spent: The Declining Real Cost of Living in America.” Dallas: Federal Reserve Bank of Dallas, 1997.
Fogel, Robert W. The Escape from Hunger and Prema- ture Death, 1700–2100. Cambridge: Cambridge Uni- versity Press, 2004.
______.“Nutrition and the Decline in Mortality since 1700: Some Preliminary Findings.” In Long-Term Factors in American Economic Growth, eds. Stanley L. Engerman and Robert E. Gallman, 439-555. Chicago: University of Chicago Press (for the National Bureau of Economic Research), 1986.
______.“Catching Up with the Economy.” The Ameri- can Economic Review 89 (1999): 1–21.
Historical Statistics of the United States, Series F1. Washington, D.C.: Government Printing Office.
Hume, David. “Of the Populousness of Ancient Nations.” In Essays, Moral, Political, and Literary, ed. Eugene F. Miller (first published 1742). Indianapolis, Ind.: Liberty Fund, Inc, 1987.
Johnston, Louis D., and Samuel H. Williamson. “What Was the U.S. GDP Then?” Measuring Worth, 2008. http://www.measuringworth.org/datasets/usgdp.
Kennedy, Paul. The Rise and Fall of the Great Powers. New York: Random House, 1987.
Maddison, Angus. Monitoring the World Economy 1820–1992. Paris: Development Centre of the Orga- nisation for Economic Co-Operation and Develop- ment (OECD), 1995. Updated 2007.
McCloskey, Donald N. “Does the Past Have Useful Economics?” Journal of Economic Literature 14 (1976): 434–461.
Lee, J., and W. Feng, “Malthusian Models and Chinese Realities: The Chinese Demographic System, 1700– 2000.” Population and Development Review 25 (1999): 33–65.
National Center for Health Statistics. Vital Statistics of the United States. Hyattsville, Md.: National Center for Health Statistics, Department of Health, Educa- tion, and Welfare, selected years.
North, Douglass C. “Economic Performance Through Time.” The American Economic Review 84 (1994): 364–365.
Preston, S. H. “Human Mortality throughout History and Prehistory.” In The State of Humanity, ed. Julian L. Simon, 30–36. Boston: Basil Blackwell, 1995.
Rockoff, Hugh. “Indirect Price Increases and Real Wages in World War II.” Explorations in Economic History 15 (1978): 407–420.
______. Drastic Measures: A History of Wage and Price Controls in the United States. New York: Cambridge University Press, 1984.
Rosenberg, Nathan, and L. E. Birdzell, Jr. How the West Grew Rich. New York: Basic Books, Inc., 1986.
Schumpeter, Joseph A. The Theory of Economic Devel- opment. Cambridge, Mass.: Harvard University Press, 1934.
Siniecki, Jan. “Impediments to Institutional Change in the Former Soviet System.” In Empirical Studies in Institutional Change, eds. Lee J. Alston, Thrainn Eggertsson, and Douglass C. North, 35–59. New York: Cambridge University Press, 1996.
United Nations Development Program. Human Devel- opment Report 1999. New York: Oxford University Press, 1999.
U.S. Census Bureau. “The Changing Shape of the Na- tion’s Income Distribution, 1747–2001.” http:// www.census.gov.
U.S. Census Bureau. “Mean Income Received by Each Fifth and Top 5 Percent of Families (All Races) 1966– 2001.” http://www.census.gov/hhes/income/histinc/f03 .html.
U.S. Department of Commerce. U.S. Life Tables, 1890, 1901, and 1901–1910. Washington, D.C.: U.S. Gov- ernment Printing Office, 1921.
U.S. Department of Commerce. Statistical Abstract. Washington, D.C.: U.S. Department of Commerce, 1978.
U.S. Department of Commerce, Bureau of Economic Analysis. “U.S. Real GDP Per Capita (Year 2000 Dollars.” http://www.measuringworth.org/graphs/ graph.php?year_from=1900&year_to=2007&table= US&field=GDPCP&log.
Wrigley, E. A., and R. S. Schofield. The Population History of England, 1541–1871: A Reconstruction. Cambridge, Mass.: Harvard University Press, 1981.
Wright, Gavin. “History and the Future of Economics.” In Economic History and the Modern Economists, ed. William N. Parker. New York: Blackwell, 1986.
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http://www.census.gov
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P A R T 1 The Colonial Era: 1607–1776
© ROSS ELMI/ISTOCKPHOTO.COM
ECONOMIC AND HISTORICAL PERSPECTIVES 1607–1776 1. The American colonial period was a time when poverty was the norm throughout
the world and wars among nations were frequent. The earliest English settlements in North America were costly in terms of great human suffering and capital losses.
2. The nations and city-states of Europe that emerged from the long, relatively stagnant period of feudalism rose to prominence in wealth and power relative to other lead- ing empires in the Middle East and the Orient and quickly dominated those in the Americas.
3. Spain, Portugal, Holland, England, and France each built international empires, and England and France especially further advanced their relative economic and military strength while applying mercantilist policies. Great Britain ultimately dominated the colonization of North America and was the nation that launched the Industrial Rev- olution, beginning in the second half of the eighteenth century.
4. Innovations in trade and commerce, the spread of practical learning, new and ex- panding settlements that added land and adapted it to best uses, and falling risks in trade and frontier life raised living standards in the New World. By the time of the American Revolution, the material standards of living in the colonies were among the highest in the world and comparable to those in England. However, the distribu- tion of wealth and human rights among the sexes, races, and free citizens was vastly unequal.
5. Although Americans sustained their long English cultural and institutional heritage, even after independence, their strong economic rise ultimately placed them in a po- sition of rivalry with the mother country. The period from 1763 to 1776 was one of confrontation, growing distrust, and, ultimately, rebellion. Throughout the colonial era, the Native American population declined through disease, dislocation, and war.
C H A P T E R 2 Founding the Colonies
From the perspective of European colonists in America, the New World was a distant part of a greatly expanded Europe, a western frontier, so to speak. The New World pre- sented new opportunities and challenges for settlers, but their language and culture, laws and customs, and basic institutions were fundamentally derived and adapted from the other side of the Atlantic. In the colonies that would first break free of Europe and become the United States, these ties were primarily to Great Britain, for in the race for empire among the European nation-states, it was ultimately Britain that prevailed in North America. Britain dominated because of its institutions and its liberal policies of migration and colonization. Accordingly, our legacy as Americans is principally English—if not in blood, at least in language, law, and custom.
To understand this legacy it is important to have at least a brief background in the rise of western Europe, the voyages of discovery, and key developments of empire build- ing in the New World. This will place in clearer perspective the demographic transition that led to British domination of North America relative to the native population and to other colonists from rival European nation-states.
EUROPEAN BACKGROUND TO THE VOYAGES OF DISCOVERY More than 10 centuries passed from the fall of Rome to the voyages of discovery that led to the European expansion into the “New World.” Toward the end of that period, the feudal age had passed, and by the late 1300s, many nation-states had emerged through- out Europe. In Russia, Sweden, England, France, and Spain, national rulers held the alle- giance of large citizenries, and sizable groups of German-speaking peoples were ruled by their own kings and nobles.
The center of European wealth and commerce rested in the Mediterranean. That eco- nomic concentration was based primarily on long-distance trade among Asia, the Middle East (mainly Persia), and Europe. Because of their locational advantage and superior production and commercial skills and knowledge, the Italian city-states of Milan, Flor- ence, Genoa, and Venice had dominated most of the Old World’s long-distance trade for centuries.
European Roots and Expanding Empires
By the end of the fifteenth century, however, northern Europe had experienced substantial commercial growth, especially in the Hanse cities bordering the North Sea and the Baltic. Greater security of persons and property, established in law and enforced through courts and recognized political entities, spurred commerce and economic investments. Growing
CHAPTER THEME
22
security in exchanges and transactions opened up whole new trades and routes of com- merce, especially in the northern and western regions of Europe. This rise often aug- mented the old trades in the Mediterranean, but the new trades grew faster than the old.
Noteworthy as well was the rapid increase in Europe’s population, which was recover- ing from the famines of the early fourteenth century and, most important, from the Black Death of 1347 and 1348. In England, for example, the population had fallen from 3.7 million in 1348 to less than 2.2 million in the 1370s; France probably lost 40 percent of its population; and losses elsewhere vary in estimates from 30 to 50 percent. During the fifteenth and sixteenth centuries, the demographic revival from that catastrophe added to the commercial growth and shifting concentrations of economic activity. The rapid growth of populations and growing commercialization of Europe’s economies were significant building blocks in the strengthening of Europe’s fledgling nation-states. Expansion in Europe and elsewhere—including, ultimately, America—was also part of the nation-building process.
For centuries, Catholic Europe had been pitted in war against the Muslim armies of Islam with one Crusade following another. By the fifteenth century, the age of Renais- sance, Europe forged ahead in many political, commercial (and seagoing), and military areas. This century was a turning point, speeding the pace of an arms race among com- peting nations and empires. The year 1492 is as celebrated in Christian Spain for its cap- ture of Granada from the Moors, ending seven centuries of Muslim rule there, as it is in the United States for Christopher Columbus’s voyage to America.
PORTUGAL AND THE FIRST DISCOVERIES It was somewhat of a historical accident that Christopher Columbus—a Genoese sailor in the employ of Spain—made the most vital and celebrated of the landfalls. Neither Spain nor the great Italian city-states were the world’s leaders in long-distance exploration. Tiny, seafaring Portugal was the great Atlantic pioneer, and by the time Columbus em- barked, Portugal could claim more than seven decades of ocean discoveries.
Having already driven the Muslims off Portuguese soil in the thirteenth century, Por- tugal initiated Europe’s overseas expansion in 1415 by capturing Cuenta in North Africa. Under the vigorous and imaginative leadership of Prince Henry the Navigator, whose naval arsenal at Sagres was a fifteenth-century Cape Canaveral, Portugal—from 1415 to 1460—sent one expedition after another down the western coast of Africa. The island of Madeira was taken in 1419 and the Canary Islands shortly thereafter. The Portuguese colonized the Azores from 1439 to 1453 and populated most of these islands with slaves imported from Africa to grow sugar. These ventures had commercial as well as military aims. Europeans had first become familiar with sugar during the early Crusades, and the Mediterranean islands of Cypress, Crete, and Sicily had long been major sugar-producing areas. The commercial development and sugar plantations of the Iberian-owned islands reflected the fifteenth-century Western shift of economic strength and activity. In addi- tion, the Portuguese and others sought to circumvent the Turk-Venetian collusion to control trade and prices over the eastern Mediterranean trade routes. Europeans hun- gered for Asian goods, especially spices. In an age before refrigeration, pepper, cloves, ginger, nutmeg, and cinnamon were used with almost unbelievable liberality by medieval cooks, whose fashion it was to conceal the taste of tainted meat and embellish the flavor of monotonous food. Accompanying the discoveries of new places and emergence of new trades was the accumulation of knowledge. New methods of rigging sails and designing ships (from one- to three-masted vessels) and other navigational advancements were learned by trial and error. These new technologies were vital in overcoming the difficult prevailing winds of the mighty Atlantic.
Chapter 2: Founding the Colonies 23
PORTUGAL AND SPAIN: EXPANDING EMPIRES As shown in Map 2.1, the greatest of the sea explorations from Europe took place within a little less than thirty-five years. The historical scope of it is astonishing. In 1488, Bartholomeu Dias of Portugal rounded the Cape of Good Hope and would have reached India had his mutinous crew not forced him to return home. In September 1522, the Vittoria—the last of Ferdinand Magellan’s fleet of five ships—put in at Seville; in a spec- tacular achievement, 18 Europeans had circumnavigated the globe. Between these two dates, two other voyages of no less importance were accomplished. Columbus, certain that no more than 2,500 miles separated the Canary Islands from Japan, persuaded the Spanish sovereigns Ferdinand and Isabella to finance his first Atlantic expedition. On October 12, 1492, his lookout sighted the little island of San Salvador in the Bahamas. Only a few years later, Vasco da Gama, sailing for the Portuguese, reached Calicut (Kozhikode) in India via the Cape of Good Hope, returning home in 1499. Following Dias’s and Columbus’s discoveries, Portugal and Spain, with the pope’s blessing, agreed in the treaty of Tordezillas (1494) to grant Spain all lands more than 370 leagues (1,100 miles) west of the Cape Verde Islands (a measurement accident that ultimately estab- lished Portugal’s claim to Brazil). Thus, the sea lanes opened, with Portugal dominant in the East (to East Africa, the Persian Gulf, the Indian Ocean, China, and beyond) and Spain supreme in the West.
By the early sixteenth century, the wealth and commerce of Europe had shifted to the Atlantic. The Mediterranean leaders did not decline absolutely; they were simply over- taken and passed by. In an international context, this was a critical first phase in the rel- ative rise and eventual supremacy of key Western nation-states.
After Spain’s conquest of Mexico by Hernando Cortez in 1521, American silver and gold flowed into Spain in ever-increasing quantities. When the Spanish king Philip II
Commercial Splendor: Venice (rendered here by Caneletto) was almost as much an Eastern as a Western city, and for hundreds of years its commercial and naval power was a great sustaining force of Western civilization.
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24 Part 1: The Colonial Era: 1607–1776
made good his claim to the throne of Portugal in 1580, Spanish prestige reached its ze- nith. By royal decree, Spain simply swallowed Portugal, and two great empires, strong in the Orient and unchallenged in the Americas, were now joined. When we reflect that no other country had as yet established a single permanent settlement in the New World, it seems astonishing that the decline of Spanish power was so imminent.
Although Spain was a colonizer, Spanish attempts to settle in the Americas lacked a solid foundation. Spain’s main interests, for both the conquistadors and the rulers at home, were treasures from America’s mines (especially silver) and Christianity for the conquered. To be sure, attempts were made to extend agriculture and to establish manufacturing operations in the New World, but the Spaniards remained a ruling caste,
MAP 2.1 Exploration
Spain and Portugal came first; then France, Holland, and England. All these nations explored vast amounts of territory in North America, giving rise to new economic opportunities, but England’s exploration gave rise to the most extensive per- manent settlements in the New World.
Chapter 2: Founding the Colonies 25
dominating the natives who did the work and holding them in political and economic bondage. Their religious, administrative, military, and legal institutions were strong and lasting, but the Spanish were more like occupying rulers than permanent settlers.
Meanwhile, the Protestant Reformation radically altered the nature of European na- tion building and warfare. When, toward the end of the sixteenth century, Spain became involved in war with the English and began to dissipate its energies in a futile attempt to bring the Low Countries (Holland and Belgium) under complete subjection, Spain lost the advantage of being the first nation to expand through explorations in America. Also harmful to Spain was the decline in gold and silver imports after 1600 as the mines of better-grade ores became exhausted.
THE LATECOMERS: HOLLAND, FRANCE, AND ENGLAND Holland, France, and England, like Spain, all ultimately vied for supremacy in the New World (see Map 2.2). English and Dutch successes represented the commercial revolu- tion sweeping across northern and western Europe in the 1600s. Amsterdam in particu- lar rose to preeminence in shipping, finance, and trade by midcentury. But Holland’s claim in North America was limited to New York (based economically on furs), and for the most part its interest lay more in the Far East than in the West. Moreover, the Dutch
MAP 2.2 European Colonies
European possessions and claims in America fluctuated. Shown here are those territories and the major cities toward the end of the seven- teenth century.
26 Part 1: The Colonial Era: 1607–1776
placed too much emphasis on the establishment of trading posts and too little on coloni- zation to firmly establish their overseas empire.
As it turned out, France and England became the chief competitors in the centuries- long race for supremacy. From 1608, when Samuel de Champlain established Quebec, France successfully undertook explorations in America westward to the Great Lakes area and had pushed southward down the Mississippi Valley to Louisiana by the end of the century. And in the Orient, France, although a latecomer, competed successfully with the English for a time after the establishment of the French East India Company in 1664. In less than a century, however, the English defeated the French in India, as they would one day do in America. The English triumphed in both India and America because they had established the most extensive permanent settlements. It is not without significance that at the beginning of the French and Indian War in 1756, some 60,000 French had settled in Canada and the Caribbean compared with 2 million in the English North American colonies.
For our purposes, the most important feature of the expansion of Europe was the steady and persistent growth of settlements in the British colonies of North America. Why were the English such successful colonizers?
To be sure, the English, like the French and the Dutch, coveted the colonial wealth of the Spanish and the Portuguese, and English sailors and traders acted for a time as if their struggling outposts in the wilderness of North America were merely temporary. They traded in Latin America, while privateers such as Francis Drake and Thomas Cavendish plundered Spanish galleons for their treasures as they sailed the Spanish Main. English venturers, probing the East for profitable outposts, gained successive foot- holds in India as the seventeenth century progressed. Yet, unlike the leaders of some western European countries, Englishmen such as Richard Hakluyt advocated permanent colonization and settlement in the New World, perceiving that true colonies eventually would become important markets for manufactured products from the mother country as well as sources of raw materials.
It was not enough, however, for merchants and heads of states to reap the advantages of the thriving colonies: Commoners had to be persuaded of the benefits of immigrating to the New World for themselves and their families. The greatest motivations to immi- grate were the desires to own land—still the European symbol of status and economic security—and to strive for a higher standard of living than could be attained at home by any but the best-paid artisans. These economic motivations were often accompanied by a religious motivation. Given the exorbitant costs of the transatlantic voyage (more than an average person’s yearly income), the problem remained how to pay for moving people to the New World.
FIRST BRITISH SETTLEMENTS IN NORTH AMERICA
Perilous Beginnings
Two half-brothers, Sir Humphrey Gilbert and Sir Walter Raleigh, were the first English- men to undertake serious ventures in America. Gilbert, one of the more earnest seekers of the Northwest Passage, went to Newfoundland in 1578 and again in 1583 but failed to colonize the territory either time and lost his life on the return voyage to England after the second attempt. Raleigh, in turn, was granted the right to settle in “Virginia” and to have control of the land within a radius of nearly 600 miles from any colony that he
Chapter 2: Founding the Colonies 27
might successfully establish. Raleigh actually brought two groups of colonists to the new continent. The first landed on the island of Roanoke off the coast of what is now North Carolina and stayed less than a year; anything but enthusiastic about their new home, these first colonists returned to England with Sir Francis Drake in the summer of 1586. Undaunted, Raleigh solicited the financial aid of a group of wealthy Londoners and, in the following year, sent a second contingent of 150 people under the leadership of Gov- ernor John White. Raleigh had given explicit instructions that this colony was to be planted somewhere on the Chesapeake Bay, but Governor White disregarded the order and landed at Roanoke. White went back to England for supplies; when he returned after much delay in 1590, the settlers had vanished. Not a single member of the famed “lost colony” was ever found, not even a tooth.
After a long war between England and Spain from 1588 to 1603, England renewed attempts to colonize North America. In 1606, two charters were granted—one to a group of Londoners, the other to merchants of Plymouth and other western port towns. The London Company received the right to settle the southern part of the English territory in America; the Plymouth Company received jurisdiction over the northern part.
So two widely separated colonies were established in 1607: one at Sagadahoc, near the mouth of the Kennebec River, in Maine; the other in modern Virginia.1 Those who sur- vived the winter in the northern colony gave up and went home, and the colony estab- lished at Jamestown won the hard-earned honor of being the first permanent English settlement in America.
Hard earned indeed. When the London Company landed three tiny vessels at the mouth of the Chesapeake Bay in 1607, 105 people disembarked to found the Jamestown Colony. Easily distracted by futile “get-rich-quick” schemes, they actually sent shiploads of mica and yellow ore back to England in 1607 and 1608. Before the news reached their ears that their treasure was worthless “fool’s gold,” disease, starvation, and misadventure had taken a heavy toll: 67 of the original 105 Jamestown settlers died in the first year.
The few remaining survivors (one of whom was convicted of cannibalism) were joined in 1609 by 800 new arrivals, sent over by the reorganized and renamed Virginia Company. By the following spring, frontier hardships had cut the number of settlers from 838 to 60. That summer, those who remained were found fleeing downriver to return home to England by new settlers with fresh supplies, who encouraged them to reconsider. This was Virginia’s “starving time,” to use Charles Andrews’s (1934) vivid label, and a time of environmental degradation (Earle 1975).
Inadequately supplied and untutored in the art of colonization, the earliest frontier pioneers routinely suffered and died. In 1623, a royal investigation of the Virginia expe- rience was launched in the wake of an Indian attack that took the lives of 500 settlers. The investigation reported that of the 6,000 who had migrated to Virginia since 1607, 4,000 had died. The life expectancy of these hardy settlers upon arriving was two years.
The heavy human costs of first settlement were accompanied by substantial capital losses. Without exception, the earliest colonial ventures were unprofitable. Indeed, they were financial disasters. Neither the principal nor the interest on the Virginia Company’s accumulated investment of more than £200,000 was ever repaid (approximately $22 mil- lion in today’s values). The investments in New England were less disappointing, but overall, English capitalists were heavy losers in their quest to tame the frontier.
1At this time, the name Virginia referred to all the territory claimed by the English on the North American continent. Early Charters indicate that the area lay between the 34th and 45th parallels, roughly between the southern portion of the Carolinas and the northernmost boundary of New York.
28 Part 1: The Colonial Era: 1607–1776
EARLY REFORMS The economic and institutional lessons of these first settlements, though negative, proved useful in later ventures, and colonization continued with only intermittent lapses throughout the seventeenth and eighteenth centuries. Because North America rendered no early discoveries of gold or silver mines or ancient populations prepared to exchange exotic wares, trading post establishments characteristic of the European outposts in South America and the Orient proved inadequate. North America’s frontier demanded a more permanent form of settlement. For this to result without continuous company or Crown subsidization, the discovery of “cash crops” or other items that could be produced in the colonies and exchanged commercially was essential. Consequently, the production of tobacco and rice and the expansion of many other economic activities discussed in chapter 3 proved vital in giving deep roots and permanent features to Brit- ish settlement in North America. In addition, substantial organizational changes were made to increase production efficiency. The joint-stock company arrangement, which fa- cilitated the raising of capital and had served the British well in other areas of the world, faltered when forced to conform to the conditions in North America. Modeled after such great eastern trading companies as the East India Company, new companies— including the London Company, the New Plymouth Company, the Massachusetts Bay Company—must receive credit for establishing the first British settlements in the New World. But their success was limited merely to securing a colonial foothold. With the excep- tions of the Hudson Bay Company (founded in 1670 and still in operation today) and the unique Georgia experiment in the late colonial period, the joint-stock company (with absentee direction from England) survived less than two decades in British North America.
The ordeals of the Jamestown experience forcefully accent the difficulties encoun- tered and the adjustments required by the early settlers. The early Jamestown settlers were brought over by the company and given “planter shares,” with profits to be di- vided five years later. Meanwhile, they were to live at the company’s expense and work wholly for the company. In effect, the colony originally operated as a collective unit, in which both production methods and consumption were shared. But collectivity encouraged individuals to work less and resulted in much discontent. Unmarried men complained of working without recompense for other men’s wives and children. Stron- ger, more able workers were embittered when they did not receive larger amounts of food and supplies than others who could or would not work as hard. In addition, com- mon ownership stifled incentives to care for and improve lands and to make innova- tions in production.
In addition, absentee direction from England created problems, because successful pro- duction required local managerial direction. Futile insistent demands from England for quick profits sidetracked productive efforts and added to the settlers’ discouragement.
Jamestown residents gained greater control over local matters in 1609 when small garden plots of land were given to individuals and again in 1612 when various institu- tional reforms were undertaken. To generate more flexible leadership and local auton- omy in that hostile environment, a deputy governor was stationed in Virginia. Steadily thereafter, centralized direction from England became less and less frequent.
As private landholdings replaced common ownership, work incentives improved; the full return for individual effort became a reality, superseding output-sharing ar- rangements. In 1614, private landholdings of 3 acres were allowed. A second and more significant step toward private property came in 1618 with the establishment of the headright system. Under this system, any settler who paid his own way to Virginia was given 50 acres and another 50 acres for anyone else whose transportation he paid. In 1623—only 16 years after the first Jamestown settlers had arrived—all landholdings
Chapter 2: Founding the Colonies 29
were converted to private ownership. The royal investigation of that year also ushered in the dissolutions of the corporate form of the colony. In 1625, Virginia was converted to a Crown colony.
Many of the difficulties experienced in early Jamestown were also felt elsewhere in the colonies. But the Puritan settlements of New England, first at Plymouth (the Plymouth Company in 1620) and then at Boston (the Massachusetts Bay Company in 1630), avoided some of the problems faced by the Jamestown settlers. For instance, because the Massachusetts Bay Company actually carried its own charter to the New World, it avoided costly direction and absentee control from England. Stronger social and cultural cohesion and more homogeneous religious beliefs may have contributed to a greater suc- cess of communal arrangements there, but as noted in Economic Insight 2.1, the Ply- mouth colonies also reverted to private holdings. Town corporations prolonged the use of common landholdings, but private landholdings steadily replaced land held in com- mon. By 1650, privately owned family farms were predominant in New England.
Another noteworthy colony established by a joint-stock venture was New York, first settled by the Dutch West India Company (1620) but taken in a bloodless confrontation in 1664 by the British. Maryland and Pennsylvania were initiated through proprietary grants, respectively, to Lord Baltimore in 1634 and to William Penn in 1681. The for- mer’s desire was to create a haven for Roman Catholics, profitably if possible, and the latter’s was the same for Quakers and other persecuted religious groups. Rhode Island’s settlement was also religiously motivated because of Roger Williams’s banishment from Puritan Massachusetts in 1644. These, the Carolinas, and the last mainland colony to be settled, Georgia (1733), benefited from the many hardships and lessons provided by the earlier settlements. Despite each colony’s organizational form, the Crown assured all set- tlers except slaves the rights due English citizens. The British empire in North America extended from French Canada to Spanish Florida and through to the sugar plantation islands of the Caribbean.
Bringing in Settlers
The Atlantic Ocean posed a great barrier to settlement in North America. In the early seventeenth century, the cost of the Atlantic passage was £9 to £10 per person, more than an average English person’s yearly income. Throughout most of the later colonial period, the peacetime costs of passage were £5 to £6. Consequently, in the seventeenth century, a majority of British and European newcomers could not and did not pay their own way to America. By 1775, however, more than half a million English, Scotch, Irish, German, and other Europeans had made the transatlantic voyage. More than 350,000 of them paid their way by borrowing and signing a unique IOU, an indenture contract.
The indenture contract was a device that enabled people to pay for their passage to America by selling their labor to someone in the New World for a specified future period of time. Often mistakenly referred to today in the press as quasi-slavery, indenture op- portunities were really an expansion of individual freedoms. These contracts were writ- ten in a variety of forms, but law and custom made them similar. Generally speaking, prospective immigrants would sign articles of indenture binding them to a period of ser- vice that varied from three to seven years, although four years was probably the most common term. Typically, an indentured immigrant signed with a shipowner or a recruit- ing agent in England. As soon as the servant was delivered alive at an American port, the contract was sold to a planter or merchant. These contracts typically sold for £10 to £11 in the eighteenth century, nearly double the cost of passage. Indentured servants, thus bound, performed any work their “employers” demanded in exchange for room, board,
30 Part 1: The Colonial Era: 1607–1776
ECONOMIC INSIGHT 2.1
PROPERTY RIGHTS AND INCENTIVES
The problems of collective ownership and equally shared consumption have existed from ancient times to today. Colonial America and communist Russia attempted such organizational forms of production and distribution, and these attempts ultimately failed. Some have termed the problem the “tragedy of the commons” (common property), which leads to over- use and speedy exhaustion of a resource commonly owned.
You are encouraged at this point to briefly review the five Economic Reasoning Propositions in Eco- nomic Insight 1.1 on page 8. These propositions ex- plain how collective ownership and shared (equal or fixed-share) consumption of the output create a “free rider” problem. To illustrate this, consider 10 workers who share ownership of the land and who collectively produce 100 bushels of corn, averaging 10 bushels each for consumption. Suppose that one worker begins to shirk and cuts his labor effort in half, reducing out- put by 5. The shirker’s consumption, like the other workers’, is now 9.5 (95 ÷ 10) bushels thanks to the shared arrangement. Though his effort has fallen 50 percent, his consumption falls only 5 percent. The shirker is free riding on the labors of others. The in- centive for each worker (Economic Reasoning Propo- sition 3, incentives matter), in fact, is to free ride, and this lowers the total effort and total output.
Conversely, suppose that one worker considers working longer daily hours (12 instead of 10) to raise total output from 100 to 102. The gain in consump- tion to each individual is 0.2 bushels, a 2 percent consumption increase for each person based on a 20 percent effort increase by one. Would you make the extra effort?
With private property for each, there is no free riding. Any effort cut is borne in proportion by the individual’s output decline. Any effort increase places all the rewards of the extra effort in the lap of the one working harder (or smarter). More generally, with private property for each, any change in output (DQ) from more effort goes to the person extending the extra effort. With common property, the gain is not DQ but DQ divided by the number in the group. The larger the group, the less the gain from working harder and the less the loss from working less—from the individual’s perspective. In other words, the larger the group, the greater the incentive to free ride. These
incentive effects (Economic Reasoning Proposition 3, in- centives matter) are telling, as Governor Bradford noted in 1623 at the Plymouth Colony in New England:
So they begane to thinke how they might raise as much corne as they could, and obtaine a beter crope then they had done, that they might not still thus languish in miserie. At length, after much debate of things, the Governor…gave way that they should set corne every man for his owne perticuler, and in that regard trust to them selves; in all other things to goe on in the generall way as before. And so assigned to every family a parcell of land, according to the proportion of their number for that end, only for present use (but made no devission for inheritance), and ranged all boys & youth under some familie. This had very good success; for it made all hands very industrious, so as much more corne was planted then other waise would have bene by any means the Governor or any other could use, and saved him a great deall of trouble, and gave farr better contente. The women now wente willingly into the feild, and tooke their litle-ons with them to set corne, which before would aledg weaknes, and inabil- itie; whom to have compelled would have bene thought great tiranie and oppression. The experience that was had in this commone course and condition, tried sun- drie years, and that amongst godly and sober men, may well evince the vanitie of that conceite of Platos & other ancients, applauded by some of later times;— that the taking away of propertie, and bringing in communitie into a comone wealth, would make them happy and flourishing; as if they were wiser then God. For this comunitie (so farr as it was) was found to breed much confusion & discontent…For the yong- men that were most able and fitte for labour & service did repine that they should spend their time & streingth to worke for other mens wives and children, with out any recompence. The strong, or man of parts, had no more in devission of victails & cloaths, then he that was weake and not able to doe a quarter the other could; this was thought injuestice…Let none objecte this is men’s corruption, and nothing to the course it selfe. I answer, seeing all men have this corruption in them, God in his wisdome saw another course fiter for them. (Bradford 1962, 90-91)
Clearly, getting the institutional arrangements right (Economic Reasoning Proposition 4) is very important.
Chapter 2: Founding the Colonies 31
and certain “freedom dues” of money or land that were received at the end of the period of indenture. This system provided an active trade in human talent, and the indenture system should be viewed as an investment in migration as well as in job training (or apprenticeship).
The first indentured immigrants were sent to Jamestown and sold by the Virginia Company: about 100 children in their early teens in 1618, a like number of young women in 1619 for marital purposes, and a young group of workers in 1620. Soon there- after, private agents scoured the ports, taverns, and countryside to sign on workers for indenture. The indentured servants were drawn from a wide spectrum of European soci- ety, from the ranks of farmers and unskilled workers, artisans, domestic servants, and others. Most came without specialized skills, but they came to America voluntarily be- cause the likelihood of rising to the status of landowner was very low in Britain or on the Continent. They were also willing to sign indenture contracts because their opportu- nity cost, the next best use of their time, was typically very low—room and board and low wages as a rural English farm worker, a “servant in husbandry.” Children born in English cottages usually went to work at the age of 10, moving among families and farms until good fortune (often inheritance or gifts) allowed them to marry. For many, a period of bondage for the trip to America seemed worth the risk.
Whether the life of a servant was hard or easy depended primarily on the tempera- ment of the taskmaster; the courts usually protected indentured servants from extreme cruelty, but the law could be applied quickly to apprehend and return servants who ran away. The usual punishment for runaways was an extension of the contract period.
Studies by David Galenson (1977–1978), Robert Heavener (1978), and Farley Grubb (1994) reveal many of the intricacies of this market in bonded labor. For example, the indenture period for women was originally shorter than for men because of the greater scarcity of women in the colonies, but by the eighteenth century, the periods of service were comparable for both sexes. The indentured servants’ work conditions and dura- tion of service also depended on location. Generally, the less healthful living areas, such as the islands of the Caribbean, offered shorter contractual periods of work than did the mainland colonies. Skilled and literate workers also obtained shorter contracts, as a rule. Overall, it was a highly competitive labor market system steeped in rational conduct.
Immigrants from continental Europe, mainly Germans, usually came as redemp- tioners, immigrants brought over on credit provided by ship captains. Sometimes the re- demptioners prepaid a portion of the costs of passage. After arrival, they were allowed a short period of time to repay the captain, either by borrowing from a relative or a friend or by self-contracting for their services. Because they usually arrived with no ready con- tacts and typically could not speak English, the contract period for full cost of passage was sometimes longer than for indentures, up to seven years. In addition, German im- migrants usually came over in families, whereas English immigrants were typically single and more likely to enter into indentured servitude. The longer period of service for Ger- man redemptioners was in part a consequence of their preference to be highly selective in choosing their master-employers, a right indentured servants did not have. Migrating in family groups encouraged this preference, and most Germans settled in Pennsylvania. Alternatively, when the families had paid a portion of their passage costs before disem- barking, their redemptioners’ time could be much shorter.
As the decades passed, the percentage of European immigrants arriving as indentured servants or redemptioners declined. By the early nineteenth century, the market for in- dentures had largely disappeared, done in by economic forces rather than legislation. Alternative sources of financing, according to Farley Grubb, largely from residents in
32 Part 1: The Colonial Era: 1607–1776
the United States paying for their relatives’ passage from the Old World, were the main cause of this market’s disappearance (Grubb 1994).
The drop in the costs of passage over this time and the rise of earnings of workers in Europe also contributed to this market’s disappearance. In addition, slavery was a viable cost-cutting alternative labor source compared with indentured servants or free labor.
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