INTRODUCTION

The expanding flow of funds that financed twentieth-century American economic growth was channeled by alternating waves of financial innovation and government regulation. At the beginning of the century, markets became more integrated as barriers to competition broke down. Yet the financial system was far from stable, and safety and soundness were the quest of public policy. The Federal Reserve System and the New Deal attempted to protect depositors and investors. They appeared to be successful because of subsequent periods of stability. Their limitations were revealed by the stock market crashes and banking crises of the Great Depression and the 1980s. Shaped by special interests, banking and financial reform built up a complex and burdensome regulatory regime. Over time, market pressures brought about the decline of traditional intermediaries and the rise of new institutions and markets. Only in the last twenty years, after inflation and recession battered the financial system did a thorough deregulation begin. Returning to pre—New Deal trends, distinctions between types of intermediaries have faded and financial markets have become more integrated and efficient.

THE FEDERAL RESERVE IN WAR AND PEACE, 1913–1929

In 1913 the Federal Reserve System was established to prevent banking crises. The Fed was a creature of late-nineteenth-century American banking, designed to correct its perceived weaknesses without changing its structure. Supervised by the Federal Reserve Board, the twelve Federal Reserve banks formed a new American “central” bank. To ensure long-term price stability, the Federal Reserve Act enshrined a gold standard rule of convertibility and enforced it by imposing gold reserve requirements for Federal Reserve notes and deposits.

Within broad limits business law always has been instrumental to American economic development. J. Willard Hurst’s classic formulation characterized nineteenth-century law and the conditions of freedom as permitting a release of middle-class entrepreneurial energy. Elaborations of this idea stressed that law encouraged dynamic rather than traditional uses of property, often favoring capitalist exploitation of weaker groups. Emphasizing the importance of incentives in the operation of economic markets or political and legal systems, Douglass C. North recognized, by contrast, that imperfect information, transaction costs, and other factors brought about outcomes that often were neither optimal nor even beneficial to those who purportedly sought such results through manipulation of the rules of the game. Thus according to North, the institutional framework underlying the impressive economic growth of the nineteenth-century United States provided incentives for individual and group action that resulted in a mix of economically productive and adverse outcomes. Groups pursued contrary views of self-interest in part because ideological conflicts fostered opposing perceptions of property rights. Perhaps the most significant instance in which interest-group and ideological struggle followed an unpredictable course was the clash between Democrats and Republicans that culminated in the Civil War. Yet to a certain extent, in the nineteenth-century American economy such clashes were endemic.

INTRODUCTION

When the twentieth century opened, there was an unusually high level of interest in the economic well-being of the working poor. The Bureau of Labor Statistics in Washington, D.C., the Statistics Bureau in Massachusetts, and the Heller Commission in San Francisco were doing the first quantitative studies of U.S. workers’ living standards. Robert Hunter, inspired by Europeans such as Booth, Rowntree, and Engel, was soon to give us our first important sociological study of poverty. The upper end of the income distribution was the object of no less scrutiny, as the Progressives fixed their eye on the monopolies and the new class of rich industrialists and professionals, who, they believed, wielded disproportionate political and economic power.

As the century drew to a close, there was renewed attention to these same issues. After two decades without economic progress for the working class, accompanied by highly visible accumulations of financial wealth by the top 1 percent, the routine publication of an income distribution report by the Census Bureau or a Congressional committee has turned into a political event. Article upon article detailing the recent rise in inequality must make it seem unprecedented to all but the most knowledgeable specialists. In fact, with regard to inequality at least, we are probably replaying the statistical record of a century ago.

The United States has such a complex system of government that a chapter can only begin to describe its nature and relationship to the American economy. Fortunately, the system itself was stable, holding throughout the 125 years from 1789 to 1914 to an essentially republican form at the federal, state, and local levels, a form that continues. Even the Civil War, great as it was on the scale of wars and bound up as it was with the moral issue of slavery, was waged to decide what history might regard as a minor issue – whether there would be two republics of American states or one. Larger issues of monarchy versus republic or of dictatorship versus democracy did not arise. These were settled by 1789, perhaps even earlier. Such stability, provided it is purchased at not too high a cost in money or freedom, may well be one of the greatest services any government can render its economy and its people. If so, Americans during their “long” nineteenth century were, with the exception of 1861–1865, indeed fortunate.

Because this long-term stability of governmental arrangements in the United States had favorable implications for economic activity, some attention ought to be given to how those arrangements came to be in place by 1789. This is done in the following section. Next is a section contending that, besides providing stability in governmental and political institutions, the federal system from its inception operated to promote a high rate of economic growth by augmenting the economic resources – the land, labor, and capital – available to the economy.

During the long nineteenth century, the United States progressed from being a colonial economy relative to Britain to become the leading industrial nation in the world. This transformation in status came largely from a rapid expansion of the economy, which was both unexpected and unprecedented, beginning with the Northeast and then spreading to the other areas of the country. In 1789 the future of the young and still modestly populated republic of the United States, a successor to a failed confederation of former English colonies on the North American mainland, was uncertain. Victory in the Revolutionary War had garnered attention for the new country, and it enjoyed a reputation as a good place for a poor man to settle, but few observers thought the United States likely to become a major power – economic or otherwise. By 1914, of course, the situation had changed dramatically. The economy had grown to become the largest in the world, supported by a rich resource base, rates of investment and population growth that were exceptional for their time, and substantial productivity advance. Not only was the United States recognized throughout the world as the technological leader, but its institutions were widely admired and not infrequently imitated.

Public interest in America’s foreign trade has always concentrated on the issue of America’s “competitiveness” or “leadership” in foreign trade, and whether government policies have promoted it. This chapter addresses those perennial concerns. What has shaped America’s ability to compete, and her comparative advantage, in international trade? Has government policy toward foreign trade been aimed at raising national living standards, and has it had that result?

The five main conclusions reached here feature some rise-and-fall patterns and some revisions of frequent misconceptions:

1. America’s comparative advantages in natural-resource products and in skill-intensive products rose and fell in waves. Our relative exports of natural-resource products peaked around World War I, while our comparative advantage in skill-intensive products peaked in the 1950s and declined until the 1990s. In retrospect, one of the most striking features of American comparative advantage is the steady ascent of skill-intensive exports from the mid-nineteenth century to the mid-twentieth, whereas the “Dutch disease” model would have predicted that our abundance of natural resources would have killed our advantage in skill-intensive manufactures as in so many other countries.

2. U.S. competitive leadership rose and fell, peaking in the 1950s and hitting a low in the early 1980s before recovering somewhat. Early in this century it fell to British and Japanese writers to blame their business leaders, their workers, their government, and their national bad luck for the American, and German, competitive edge in the prestigious modern sectors. By the 1970s and 1980s America had caught up to Britain as a world leader in self-flagellation over lost markets.

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INTRODUCTION

American farms and farmers ”ain’t what they used to be.” To start with, there are not so many of them. In 1910, 32 million people, comprising 35 percent of the nation’s population, lived on 6.4 million farms. By 1990 only 1.8 percent of the U.S. population (4.6 million people), remained on America’s 2.1 million farms. Although dwindling in numbers, the remaining farm work force is highly productive; in 1990, the typical farm worker produced fifteen times as much as his counterpart in 1910. Over this period, the differences between farmers and non-farmers have diminished, so it is now difficult even to define either the farm sector or who is a farmer. Today one-half of people who work on northern farms do not live on farms, and one-half of the people who live on farms work off farms. In 1989 the average income per northern farm was $46,500; but 51 percent came from non-farm sources and another 12 percent from government payments.

Powerful forces have reshaped northern agriculture. Mechanical and biological innovations dramatically increased farm productivity and changed the nature of farm work. The transportation and communication revolutions integrated the farm with the rest of society. The growth in non-farm wages put enormous pressure on agricultural labor markets. And twenty years of depression forged a new farm policy. In 1910 northern agriculture closely approximated the competitive ideal; today it is a highly regulated industry. Federal programs originally justified as emergency measures have proven very difficult to end as Jefferson’s once resourceful farmers have become dependent on government handouts.

Twentieth-century American population growth has been remarkable in many respects. Mortality has been reduced at a rate never before seen. There has been a gigantic boom and bust in childbearing. With fertility currently low and life expectancy high, population aging has emerged as a new concern. The trend in the spatial distribution of population has departed sharply from that in the nineteenth century, as new directions of internal migration have appeared, and the origins of international migration have shifted from Europe to Latin America and Asia. These developments are due partly to economic conditions, but public policy and other factors have also been at work. This chapter takes up, in turn, fertility, mortality, internal migration, and international migration. It concludes with an analysis of the implications of population aging for future economic growth.

FERTILITY

Before World War II it was confidently assumed that American population growth was grinding to a halt. This assumption was subsequently belied by the huge upsurge in population growth following World War II, described by one scholar of the postwar period as “perhaps the most unexpected and remarkable feature of the time” (see Figure 9.1, top panel). This population boom, which peaked in the late fifties, was followed by an equally surprising population “bust.” Although few scholars in the late 1950s expected the undiminished continuation of the high growth rates prevailing at that time, no one foresaw the rapidity and depth of the subsequent decline. This boom and bust pattern of population growth is one of the most dramatic and unanticipated developments of the post—World War II period.

INTRODUCTION: WHAT IS LABOR LAW? WHAT IS ITS HISTORY?

Labor historians focus on the relations over time between employers and employees. Traditionally they have treated these relations as between two irreducibly collective social phenomena – capital and labor. Unsurprisingly, then, when it has come to writing the history of labor law, what has emerged is largely a history of the law that has impacted most upon the relations of capital and labor as organized interests, the law of collective bargaining and its antecedents. When, for example, a quarter century ago, Dean Harry Wellington of Yale Law School chose the beginning of the nineteenth century as the most appropriate point of departure for his study Labor and the Legal Process, he explained that he wanted to “begin at the beginning of American labor law,” and he defined that beginning as the moment in American history when journeymen’s combinations began to be prosecuted as common law conspiracies in American courts.

Chronologically, as we shall see, Wellington’s point of departure does in fact have much to recommend it. In addition, understanding the history of the law of collective organization and bargaining remains of the first importance to understanding the historical relationship between law and labor overall. But that story is not the full story. In particular, it is a mistake to treat the law of collective activity in isolation from the legal history of the individual employment relationship. Here, then, we will situate the history of collective bargaining in the context of the history of the law of individual labor, the “law of master and servant.”

INTRODUCTION

Thomas Jefferson envisioned the United States as an experiment in political democracy founded upon an economy of small farms. This essay examines the geographic expansion and economic development of agriculture during the nineteenth century across the northern region, where Jefferson hoped his vision would materialize most clearly. Central to realizing this goal was transferring land in the public domain into the hands of aspiring farm families. Our theme in this chapter is the heightening tension between the political vision of a nation inhabited by self-sufficient, landowning farmers and the economic reality of increasing agricultural commercialization, tenancy, wealth inequality, and industrialization.

The century opened with an agricultural-commercial economy in which farming played the central role. It closed, however, with agriculture as a relatively diminished sector encroached upon by a rapidly advancing industrial system and by corporate business. In between, farming evolved from a simple, traditional activity into a highly productive commercial enterprise that not only fed the domestic population but exported worldwide and supplied the raw materials that fueled American industrialization. The outcome, ironically, was an increasingly productive farm sector populated by increasingly discontented farmers. These individuals, who believed that the national economy was developing at their expense, ultimately sought governmental solutions when markets did not meet their personal expectations. Nevertheless, the structural transformation progressed, becoming a driving force behind the national population’s dramatically improving economic well-being over the nineteenth century.

INTRODUCTION

Slavery had long existed in many parts of the world prior to the settlement of the Americas. While the basic legal provisions and the conditions in which slave labor was used differed, few, if any, periods in world history had not had some form of enslavement of individuals. These individuals were frequently, but not always, from other societies. While sociologists might point to the distinguishing features of slavery in most societies as including “social death” and alienation – the slave as an outsider – in order to understand the economic implications, we wish to regard the slave as property. Slaves could be bought and sold (as well as freed), the rights to their labor belonged to their owners, and the offspring of a slave mother was regarded as slave property of her owner. To function effectively, slavery must be accepted by members in the potential slaveowning class and, to those societies with a code of legal controls, defended by the law.

ORIGIN OF SLAVERY IN THE AMERICAS, OUTSIDE THE UNITED STATES

Although slavery has been widespread throughout history, the distinguished classicist Moses Finley has argued that “there have been only five genuine slave societies,” societies whose social and economic institutions were dominated by the existence of slavery. Two were in the ancient world, Greece and Rome, and three in the Americas between the sixteenth and nineteenth centuries, Brazil, the Caribbean, and the U.S. South.

The growth of the public sector — that portion of the economy controlled by government — represents one of the most remarkable features of the economic history of the twentieth century. Growth has been relative as well as absolute. Despite the swift expansion of the American economy during nearly all of the century, the public sector has tended to grow more rapidly. This trend of public sector growth emerges regardless of the measure of government activity employed, and it holds for all levels of government.

Illustrative of the great shift in economic structure is the trend of all government expenditures —the sum of purchases of goods and services and transfer payments — at all levels of government. Prior to World War I, the government spent at a level approximately 7 percent to 8 percent of gross national product (GNP); by the 1970s government spending had reached nearly 40 percent of GNP.

The stunning increase took place in a largely discontinuous fashion; it was primarily the cumulative result of several rather discrete transitions (see Table 17.1). Each transition accompanied a major emergency in national life — a great war (including the Cold War) and/or severe economic depression. The emergencies appear to have had an “upward ratchet” effect, in that after the crisis, government spending stabilized at levels substantially higher than those that prevailed before the crisis. World War I was the first such crisis of the twentieth century, and it produced a sharp increase in the relative level of government spending, which held after the conclusion of hostilities.

INTRODUCTION

This chapter covers growth and structural change in Canada over the last century. During this period Canada grew from a country with a small and widely scattered population and vast unsettled lands to an urban-industrial nation. The transformation, although not without its problems, nevertheless was highly successful, chiefly due to the discovery and then successful exploitation of a series of staple exports, beginning with wheat in the 1890s and broadening to include pulp and paper, minerals, and, most recently, oil and natural gas. The export of natural resources is therefore an enduring theme in any explanation of the forces generating long-run growth in Canada. However, as the century progressed, other factors were added to the determinants of growth. With a larger population and higher average income the Canadian economy itself proved to be an effective promoter of growth. Hence, by the end of the century, the forces generating change had become more complex. They involved influences associated with both the international sector as well as with internal developments, and their interaction. What follows, then, is an attempt to offer explanations for these changes and to set out some of their consequences.

The twentieth century can be divided into three broad periods. First, the years from 1896 to 1929 were ones of rapid growth. They include such important developments as western settlement, the emergence of wheat as Canada’s primary export staple, and the creation of an integrated national economy. Second, the period 1930 to 1950 is one of disruption. It covers the Great Depression and war.

THE THREE GREAT QUESTIONS

Alexis de Tocqueville, Frederick Jackson Turner, and Simon Kuznets have set out the fundamental questions that dominate consideration of inequality in the nineteenth century. Their questions, posed in 1835, 1893, and 1955 respectively, have not yet been definitively answered. Nor are answers close at hand, for these questions pose difficult methodological issues, relate to changing values concerning inequality and economic opportunity, and require quantitative evidence on poorly measured distributions of income and wealth as well as information about economic opportunity. Yet each of the questions retains its interest and relevance to judgments today about economic equality in the nineteenth century.

From May 1831 to February 1832 Alexis de Tocqueville, in the company of Gustave de Beaumont, made his epic journey through North America, traveling west across New York to the frontier in Michigan, then northeast into Canada, down to Boston, Baltimore, and Philadelphia, west to Cincinnati, Nashville, and Memphis, down the Mississippi to New Orleans, overland to Washington, and back to New York City. Tocqueville and Beaumont were entertained by various levels of society, which they interviewed extensively, and observed with dispassion and insight the structure of this strange new democracy.

By the outbreak of World War I, the United States economy had acquired (to use Robert T. Averitt’s phrase) a “dual” structure, consisting of a “center” of large, managerially directed firms surrounded by a “periphery” of much smaller concerns, often run by their owners. In the center parts of the economy, large firms operated in tight oligopolistic markets, where price competition had been all but eliminated. Firms in these sectors were primarily interested in preserving their market shares and insuring their long-term growth. To this end, they integrated backward into raw-material acquisition and forward into distribution and worked to promote consumers’ loyalty to their brands. In the peripheral sectors of the economy, by contrast, enterprises were small and markets competitive. Few firms had the resources to pursue vertical integration or advertise their brands nationally. Time horizons were typically short, and survival depended more than anything else on keeping production costs low.

This division of the economy into center and peripheral sectors was a relatively recent development. Outside the railroad industry, large firms did not appear until the last quarter of the nineteenth century. By then, however, technological change had raised the scale of enterprise in a number of important industries, and as firms increased in size their behavior changed. Once firms grew large enough relative to the market to affect the prices at which they (and others) could sell their output, the rivalry among them became more intense. Each firm stood to benefit by undercutting its competitors’ prices and increasing its share of the market at its rivals’ expense.

INTRODUCTION

The relationship between the farmer and the market in the nineteenth century was frequently ambiguous and fraught with contradictions. Agriculture’s champion, Thomas Jefferson, the philosopher and politician, urged farmers to avoid “the casualties and caprice of customers” through self-sufficiency. But Jefferson the farmer lamented the total want of demand except for our family table” and wished for nothing more than “a rich spot of earth, well watered, and near a good market for the productions of the garden [emphasis added].” While Jefferson exalted the self-sufficient farmer, he was among the first to admit that Americans had a decided taste for navigation & commerce. Indeed, the debt-free farmer with the means of sustenance at his back door was free to choose his level of market involvement in a way open to few, if any, others. For most, self-sufficiency and barter were indicators of market absence, not market avoidance. The “moral economy” where community values dominated individual self-interest, where prices were set by custom, and where reciprocity governed exchanges may have existed, but only temporarily and hardly ever by choice. Settlements on the frontier had little choice but to be self-sufficient. With low population densities, great distances, and high transport costs, few crops could be profitably marketed by the frontier farmer. Under such circumstances, the successful farmer – one who best provided for his family – was indeed the one “who did everything within himself.” Such a person survived and prospered only on the fringes of Von Thünen’s Isolated State, but his isolation did not last long.