Dr. Wallis considers this to be one of the greatest papers ever written in Economic History, and it covers a lot of ground. The guts of the paper is divided into three major portions, each with its own punch line. You should get each of these major points from the three sections of the paper:
First, we want to place this in perspective by figuring out what is going on in the time period Callender is analyzing. The growth period he is most concerned with is from 1815 to the Civil War in 1861. We need to ask what is happening before and during this period to understand what is going on.
At the end of the 18th Century, the Napoleonic Wars break out and all of Europe is turned into a battlefield between British and French armies (see especially Atack and Passell p.116-120). The United States stays neutral for a while, and is content to ship goods to both sides. Eventually the warring parties get mad at the fact that the Americans are supplying their enemies and both start to attack American shipping. The Americans in turn issue a blanket embargo and prohibit trade with anyone caught attacking American ships. This is a poorly disguised attempt by the Jeffersonians to strike at Britain. The policy is changed to be a targeted embargo that only hits Britain and not France - the British and Americans are eventually drawn into open conflict: the War of 1812.
The main consequences of the Napoleonic Wars is that American shipping expands a lot to supply the warring sides. Also, American manufacturing takes hold to supply the goods to ship abroad. A peace treaty is signed in 1815 to end hostilities between the Americans and the British. When this happens, regular trade opens up again and the American manufacturing that was born during the embargo and war are hit hard by cheap British competition. American shipping as a fraction of world trade also declines. Without the special circumstances of wartime trade, the Americans need to look elsewhere for profitable opportunities.
Recall from the population section of the course that the rate of population growth is shifting to include relatively more immigrant workers. The fertility rate is declining but increasing immigration from Northern Europe is making up for this drop. In the 1840s, we have the major influx of immigrants from Ireland during the potato famine. The relevant information is in chapter 6 of Hughes and Cain.
Other things occurring during this period is the westward expansion of the population. Remember that after the Northwest Ordinance and Land Ordinance, settlers could purchase land and settle in the Ohio River Valley. During the 1820s and especially the late 1830s and parts of the 1840s, the entire midwest is settled and purchased from the national government. This is all covered in chapter 9 of Atack and Passell.
Dr. Wallis calls this the goose that lays the golden egg - the fact that you can get economic growth without any increase in resources or technology. All you need to do is specialize and you get a more efficient economy that can produce more. Callender (and later North, which is why I refer to this as the North-Callender framework) breaks the new republic into three broad regions of specialization.
The closest parallel to this setup that you've already seen is the triangle trade between the West Indies, the Northeast colonies, and Britain. In that trade, the Northeast colonies wanted to buy manufactures from Britain but didn't make anything Britain wanted. Their solution was to find a market for the things they could make, take cash or goods that the British wanted, and use that to pay the British for manufactures. Callender even references this specific example on p.126.
The North-Callender framework involves the shift from the United States from foreign exterior markets to internal American markets. The three regions of the country each specialize in something and exchange with each other to reap gains from trade like we saw in Econ 200:
The idea is that the South grows cotton and has the North ship it to Britain for them, paying for insurance and freight costs with the money they get from the cotton sales. They also purchase some manufactures from the North using this money. The West needs the North for financing and insurance for farm building and they also buy manufactures. The West pays for this by sending back food to the North. Also, since the South specializes in cotton production, it uses some of its cotton money to buy food from the West. Thus, every region specializes in its comparative advantage industries and they all trade with each other.
On p.117, Callender stresses the point that the farmers moving to the West could have the best farmland in the world, but it wouldn't make them productive if they couldn't get paid for growing lots of food. This is where transportation improvements come in. The South, as we saw in the colonial period, is blessed with a river network. There is, however, no way to get goods (especially not heavy grain or pigs) to the Northeast or even most parts of the South from the Midwest unless you are lucky enough to be on the Ohio or Mississippi River.
Why do states want to build canals and railroads? Because it allows for profitable sales of crops to the rest of the nation or the rest of the world. What does this accomplish? It gives incentives for people to move to that state because they will realize that they can make a lot of money farming (because that particular state has a way to get the crops to market). Callender's punch line is that "they must be able to dispose of these commodities in exchange for the commodities in which they cannot so easily produce,- in a word, they must have a market." (p.117) Why do states want people to move in? Remember the land-labor ratio. There is a lot of land available but very few people, and land is only worth something if there are people around to work on it in such an environment. So if you can somehow attract a lot of people to your land, the value of your land shoots up. This is what the people running the Western states are trying to do: attract lots of settlers so your land values increase. See p.164-171 in Atack and Passell for this. The only way to do it is to provide prospective settlers with good economic opportunities by building transportation networks to open up markets.
In the second part of the paper, Callender talks about the costs of building canals and evaluates the possibility of private firms building them on their own. From a strictly financial standpoint, we can say that "there had never been an industrial undertaking in the country that called for as much as a million dollars capital. . . The people knew nothing of large enterprises in which great amounts of capital had to be sunk, and profits awaited for a long period of years." (p.136) To put this million dollar figure into perspective, the first major canal project, the Erie Canal in 1817 undertaken by New York, involved a 9 million dollar initial investment. (see Atack and Passell p.150)
The problem with leaving this to private individuals, then, is that they simply can't raise the capital to build these things. You might consider the history of credit in the United States when thinking about this. Recall the Beard and McGuire and Oshfeldt papers - security of credit and enforcement of debt repayment was a huge issue in the early republic. With that kind of track record, it shouldn't be a surprise that amassing large amounts of credit would be difficult. Callender talks about the possibility of attracting foreign capital and goes into a long discussion on the availability of British capital. After the Napoleonic Wars, there is an overabundance of capital in Britain seeking profitable investment - think about how in Econ 201 interest rates fall when there is too much capital and not enough things to invest in. British investors wanted to find something to use their money for, but if you're across the Atlantic ocean with no telephone or even telegraph, there is no way to get credible information on what investments are good or bad. "He could not acquire the knowledge necessary to judge the merits of the project he was asked to support." (p.152)
This is where the government comes in. Callender talks about the features of the government policy at the national level that helped convince British investors to buy American bonds on p.142-143. But this is the national government - why would that tell the British anything about the credibility of the states? The British investors didn't make the distinction, which is understandable since there was no such thing as a lower state government anywhere else in the world. So the British are thinking that the American governments are really credible and willing to buy bonds - states could sell bonds and then turn around to hand the money over to private firms to get the job done. Also, the government could collect money from the many small savers domestically by taxing them and handing that money over to the firms. (p.138) So government was able to mobilize large sums from both domestic and foreign sources that private firms could not - this is why government intervention is crucial to building transportation improvements.
Callender first defuses the myth that people hated corporations: "The readiness with which the legislatures of all the States created corporations for all sorts of purposes, whenever they were called for by individuals . . . shows that the opposition to corporations as such was insignificant." (p.156)
The states realized what they were doing and evaluated transportation improvements as public goods. "A more important inquiry is what are the advantages which the people of this State may derive by the construction of navigable canals." (p.158) Callender gives us another great quote, this time from the Governor of Virginia, that the main thing to consider when deciding to fund a canal project was more "the benefit to be derived from increased and enhanced value of lands than to returns in the form of tolls to the treasury." (p.158) The arguments used to support the construction of canals was that they had huge positive externalities for the citizens who would be serviced by the canals.
Even had corporations been able to raise the capital, they may not have been able to make enough profit off a canal and the canal might not be built anyway. Therefore, government is justified in funding and overseeing the construction of transportation improvements that could be huge public goods. This is the logic Clay uses in the long quote on p.157.
Banks were a different thing altogether, though, and were created even in the South. Rather than serving the public good, "on the contrary, they were regarded as very profitable enterprises, and the investment of capital in them as a distinct privilege." (p.160) State governments tried to buy bank stock to funnel some of these profits to pay down state debt. "In all, except the cotton States of the Gulf region, the desire to secure for the benefit of the public the large profits to be earned in the banking business was an important, if not the most important, motive which led to the States to invest in these industries." (p.160)
The reason it was different in the Southwest (and actually in the West too, Dr. Wallis gave the example of banks extending credit to wheat farmers in Ohio) was that banks had a capital mobilizing character similar to the transportation impovement intervention by the states in the North and West regions. "The planters of this region had therefore to attract capital from the North and from Europe; and for this purpose the credit of individual planters or of such corporations as could be formed in a new country was as inadequate as it was in the Northern States to secure funds for canals and railways." (p.162) Banks were used as a medium for states to lend credibility to planters in this manner: The state buys bank stock and the state bank lends to farmers. To pay for this, the state issues bonds to borrow from investors. So in effect the investors are lending indirectly to the farmers with the state serving as a middleman. The investors are happy because they get to deal with a (supposedly) credible state government instead of risky single planter ventures. When connecting distant markets, providing credit to facilitate trade is a co-requisite to lowering transportation costs; being financially able to move agricultural goods is just as important as being physically able to move them.
So what should you get from this paper? How does it fit into the rest of the course?
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© 2002 Andrew N. Kato (04/01/02)