Transcript Early National Period

Economic Growth before the
Civil War
Walton and Rockoff
Ch 7-8
Overview
• What happened to economic growth before
the Civil War?
• Agreement after 1840. Lots of estimates
before 1840
– Census does not collect data on agricultural
production until 1840. Since most of population is
employed in agriculture, estimates before this
time are base on limited data.
• Walton and Rockoff rely on trade data.
• Trade data shows that the % trade to Britain
and its colonies declines
• Volume of trade increases, but per capita
exports do not change much
• Lots of disruption to trade
• International Trade is important but not
crucial
Why does trade increase?
• Removing trade restrictions reduces cost of imports
and exports
• Constitution clarifies trade law
• Structural change in Textile industry
– 1793, Eli Witney invents the cotton gin which reduces the
cost of cotton, raw material
– Industrial Revolution in Great Britain centers on textile
production which increases productivity
– leads to increase the demand for cotton grown in US
What about GDP per capita
• Paul David
• “The Growth of Real Product in the United States
before 1840:New Evidence, Controlled Conjectures,”
Journal of Economic History 27 (June 1967)
• David begins with the statement “Prevailing scholarly
opinion evinces disturbing symptoms of latent
schizophrenia on the subject of economic growth in
antebellum United States.”
David’s estimates
• David begins with a simple identity that can be
estimated with data available
• Three separate episodes of growth from 1790 to
1860.
– 1.6 % Per year growth in per capita income, ends with the
trade embargo of 1807 and continuing through the War of
1812.
– mid 1820’s to mid 1830’s-2.5% per year in per capita
growth.
– 1845 to 1860- 2.1 % per year.
– Overall increase of about 50% from 1800 to 1840.
Why does trade increase economic
growth ?
• Comparative advantage- allows the good to be
produced by the lowest cost producer
• Specialization and trade go together
• Less costly for US to specialize in cotton
production and buy cotton cloth from Britain.
• When trade is disrupted by Napoleonic Wars,
Jefferson’s trade embargo and War 1812, rate
of growth of US economy declines
Trade Embargo
• Not all sectors of the economy are hurt
• Manufacturers in the US gain from the
embargo and trade disruptions caused by the
War of 1812
Simple model of economic growth
• Production Possibilities Frontier (PPF) shows
the combinations of goods and services which
can be produced using the existing technology
and existing resources
• Because resources are scarce, choices must be
made between alternatives
• PPF shows available choices
PPF for economy with lots of producers
•Shows combinations of bread and
water which economy could
produce with existing resources.
•Slope of PPF is opportunity cost
B
•Lowest cost producers produce
first
•Slope goes from flat to steep
•Trade allows country to move off
PPF
W
PPF for economy with lots of producers
•More resources (land, labor
capital) cause curve to shift.
•Technological change also
shifts curve may change its
slope
B
W
Accounting for Growth
• Between 1840-1860,
– 49% growth due to growth in Labor
– 26% growth due to growth in Capital
– 10 % growth due to growth in Land
– 15% growth due to growth in Productivity
• Most of population still in agriculture , so increases in
agricultural productivity is most important
• Why does Land increase?
Western Expansion (more land)
• Louisiana Purchase of 1803 doubled the size
of country
• More Land
• Higher Productivity Land
– Yield per acre is higher
Land Policy
• New Questions
– Distribution of Public Land
• How will land be administered?
• How will sales be organized?
– Political organization of new territory
• Relation to existing states?
Land Distribution-Price
• Sell land at full market value?
– Federalist idea increase revenue to central
government
• Sell land below market value?
– Jeffersonian ideal of a nation of small farmers
– Small lots, low prices, credit
• Both systems create opportunities for rent
seeking behavior
• Set price at profit maximizing level creates
rents for existing government
– What is market price?
– Favors the wealthy and well connected
• Low price makes land affordable
– encourage speculators
– What happens when price is set below the market
level?
– Qd>Qs, rationing of some type is necessary
Original Pattern of settlement
• New England model-orderly settlement
– Townships with carefully surveyed tracts of land
– Auctioned to settlers
– No one could own land that had not been
surveyed
• Southern model
– Settler selects tract and asks surveyor to mark it
off
Land Ordinance of 1785
• Original states initially claimed territory west
to Ohio River, last states relinquished claim in
1784
– Surveyed parcels, public auction (details in nest
slide)
– Lots of corruption
• Difficult to enforce rules
– Lots of Changing rules
– Federal Government never makes much money
Land Survey
Northwest Ordinance of 1787
• What is political organization of new territory?
– Originally consider part of existing states
– Should they become independent states
• Northwest territory established
– Governor and judges appointed by Congress
– Established process for area to become states
Other Land Acts
• Continuing controversy about disposition of
land
• Homestead Act 1862
– Anyone over 21 could have 160 acres of public
land if they lived on land or cultivated it for 5
years
Effects of Land Sales
• Land Policy is successful at distributing land
– Most of good land distributed by 1860
– Did not provide a major source of gov revenue
• How did it effect income distribution?
– Land speculation
• Informational asymmetry
• Some got rich, some did not
– Not clear it had large effects?
Where did people go? Population Distribution by
Regions, 1810–1860
Moving Frontier
Why did increase in settlement
happen at this time?
• Were settlers reacting to incentives?
– Returns of agricultural investment about the same as other
investments (Not higher or lower)
• Evidence suggests settlers were reacting to economic
incentives
• Close correlation between crop prices and land
prices
• Gold and Silver discovery in West encourages
migration
U.S. Public Land Sales and Cotton
Prices, 1814–1860*
Why is land settled at this time?
• Reduction in transport costs
– Increased Agricultural productivity because of
increase yield of western land
– Increased specialization possible with larger
markets which effects both agriculture and
industrial markets
• Rule of thumb is transport cost make up no more than
50% of total price- lower the cost allow for farther
shipping-