45-855 Railroads, The First Big Business: Topic 7

Additional Sources for the Lecture:

7. Railroads and the Development of Agriculture
   
   
1. 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.

2. 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:

1. High railroad freight rates.
   
   
2. Grain elevator companies.
   
   
3. Middlemen in general.
   
   
4. Monopolies in general.
   
   
3. 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!
   
   

1. 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.

1. 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.

2. 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!

2. 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.

4. What Explains the Complaints?
   
   
1. 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.
   
   
2. Robert McGuire’s uncertainty and unrest argument: Robert 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 blame.