45-855 Railroads, The First Big Business: Topic 7
Additional Sources for the Lecture:
Higgs, Robert. 1970. "Railroad Rates and the Populist Uprising." Agricultural
History 44 (July 1970), pp.291-297.
McGuire, Robert. 1981. "Economic Causes of Late-Nineteenth Century Agrarian
Unrest: New Evidence," Journal of Economic History 41 (Dec. 1981),
Williamson, Jeffrey. 1974. Late Nineteenth-Century American Development: A
General Equilibrium History. New York: Cambridge University Press.
- Railroads and the Development of
- The Expansion of the Railroads led to the Expansion of
Agriculture – Between 1850 and 1870 the expansion of the rail
net into the Midwest led to a dramatic increase in grain output. For
example, wheat production increased from 15.2 million bushels to 104
million bushels and corn production increased from 68.3 million to 218.6
million bushels. This increase was not due to productivity gains,
rather it was due simply to more land being brought into production
because of the railroads.
Improved Land, 1870
Improved Land, 1900
- The Farmers’ Complaints – The period 1865 and 1896 was marked
by a persistent deflation. Commodity prices fell steadily
with a few ups and downs until the latter half of the 1890s. The farmers
complained bitterly about this and blamed their problems on:
- High railroad freight rates.
- Grain elevator companies.
- Middlemen in general.
- Monopolies in general.
- Were the Farmers’ Complaints Justified? –
There can be a large gap between what is objectively true and what
people think is true. Based upon the evidence – with, of course,
the benefit of hindsight – the farmers’ complaints were not
justified. This matters because so much of the anti-business imagery
present in American politics stems from this era of the "Robber
Barons". There is no denying that many of the business leaders
of this time were quite ruthless and unethical. However, these abuses
have been greatly exaggerated by historians writing in the liberal-left
tradition. Unfortunate, but true, the winners write the history!
- Freight Rates – There is no question that railroad rates fell
faster than the general rate of deflation over this period – the evidence
is overwhelming. For one thing, the success of
Andrew Carnegie in the steel rail business (see next topic) forced
down the price of steel rails to $20 a ton by the 1880s. Consequently
the railroads rapidly switched over to steel rails so that by 1890 over
80 percent of the mileage was steel. Since steel was 15 to 20 times more
durable than iron this led to a tremendous increase in productivity because
it allowed much larger locomotives, larger freight cars, longer and heavier
trains, and so on.
Higgs: (Price Received by Farmers)/(Freight Rate Index)
- Robert Higgs in a 1970 study shows that the ratio (Prices
Received by Farmers)/(Freight Rate Index) for several crops was roughly
constant through this period. In other words, at a minimum,
commodity prices were deflating at the same rate as freight rates.
Williamson: Figure A.2, Freight Rate as Percentage
of Farm Price Per Bushel of Wheat
- Jeffrey Williamson in a 1974 study uses spot price
differentials between the grain exchanges in New York City and those
in Iowa and Wisconsin to compute freight rates for grain. These spot
price differentials correlate very highly with transportation costs for
obvious reasons. His research shows that freight rates expressed as
percent of farm price fell steadily from 1870 to 1895. That is,
freight rates on grain fell faster than the price level!
Eichengreen: Table 4, Regression Results By State,
- Mortgage Rates – Barry Eichengreen in a 1984 study found that
Midwestern farmers, after controlling for risk, paid the same
mortgage rates as borrowers in the Northeast. Eichengreen uses 1890
census data in a regression analysis of mortgage rates. The dependent
variable was the average mortgage interest rate for the 47 states and the
independent variables were the average prices for a variety of crops, the
percentage of improved and cultivated lands, and some other variables.
He then uses the estimated coefficients to produce the predicted state by
state risk-adjusted mortgage rates. When this variable is then used as a
dependent variable with a single indicator variable for Northeast, the
result is not statistically significant. In other words, once you control
for risk, the farmers were paying the prevailing rate of interest.
Eichengreen: Table 6, Estimates of the Risk Premia
Eichengreen: Test For Regional Differential in Risk
Adjusted Mortgage Interest Rates
- What Explains the Complaints?
- Anne Mayhew’s change of life argument: Anne Mayhew in a 1972
study argues that farmers’ complaints were the result of the switch from
a system of subsistence agriculture to a market system of agriculture.
The fertile area of the Midwestern plains was largely settled
before the railroads got there. Farmers typically had more land
than they cultivated because there was nothing that they could do with
the surplus crops. With the arrival of the railroads farmers could
cultivate all their land and export the surplus. As the plains became
more densely settled and the rail net laid down, the farmer was drawn
into a pattern of crop specialization and borrowing from lenders to buy
need supplies. In short a commercial system. In addition, farming was
an inherently uncertain occupation – insects, plant diseases, droughts,
prairie fires, floods, hail storms, blizzards, etc., had the effect of
making yields and prices fluctuate from year to year. In a subsistence
system, the farmer could always grow enough extra to make it through the
lean years but once they were drawn into a commercial system, this
uncertainty was harder to manage. Consequently, farmers lashed out at
those economic actors who they blamed for their money problems.
- Robert McGuire’s uncertainty and unrest
McGuire in a 1981 paper provides strong support for Mayhew’s interpretation.
McGuire hit upon the idea to correlate the incidence of protest activity
by farmers with measures of price, yield, and income variability of four
major crops – wheat, corn, oats, and hay. He calculated rank-order
(Spearman) correlations over the states between the protest levels and the
measures of variability (note that these are simply variances). For
the 1866-1909 period he found the correlation for price was .77, for yield
.81, and for income .73. In other words,
those states most active in the
protest movements in a given sample period usually had the highest levels
of price, yield, and income variability. So,
when times were good the
farmers did not protest, when times were bad they sought out someone to