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Agricultural Terms of Trade in Four Midwestern States, 1870–1900

Published online by Cambridge University Press:  11 May 2010

John D. Bowman  and
Richard H. Keehn
John D. Bowman
Affiliation:
Sangamon State University
Richard H. Keehn
Affiliation:
University of Wisconsin-Parkside
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Extract

From the end of the Civil War down to 1900, the American agricultural sector was subject to continuous political and social upheaval. While the South and Far West were a part of this movement, the heartland of protest remained in the Midwest. The traditional view has been that this unrest and protest was at least partially based on the worsening economic position of the farmer. Farmers complained of being exploited by moneylenders, victimized by railroads and other middlemen, cheated by speculators and faced with prices received falling faster than prices paid, thus reducing real purchasing power. This last view is put forth by Faulkner: “While the prices of farm commodities declined, those of manufactured products, dominated by monopoly practices, remained high or did not decline proportionally.”

Type
Articles
Information
The Journal of Economic History , Volume 34 , Issue 3 , September 1974 , pp. 592 - 609
Copyright
Copyright © The Economic History Association 1974

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References

The authors gratefully acknowledge financial support from the Economics Department and the Graduate School or the University of Wisconsin. The paper has benefited significantly from the critical comments of three anonymous referees whose assistance it is a pleasure to acknowledge without implicating them in any remaining errors.

1 For a summary of the historical literature see Bowman, John D., “An Economic Analysis of Midwestern Farm Land Values and Farm Land Income, 1860 to 1900,” Yale Economic Essays, V (Fall 1965), 317–362.Google Scholar The best of the works cited are Buck, Solon J., The Agrarian Crusade (New Haven: Yale University Press, 1920)Google Scholar, and The Granger Movement (Cambridge: Harvard University Press, 1913)Google Scholar; Hicks, John D., The Populist Revolt (Minneapolis: University of Minnesota Press, 1931)Google Scholar; and Pollack, Norman, The Populist Response to Industrial America (Cambridge: Harvard University Press, 1962).Google Scholar For recent summaries of the economic aspects of farmer complaints see North, Douglass C., Growth and Welfare in the American Past (New York: Prentice-Hall, 1966), Chapter IIGoogle Scholar; Higgs, Robert, The Transformation of the American Economy, 1865–1914 (New York: John Wiley & Sons, Inc., 1971), Chapter IV.Google Scholar

2 Faulkner, Harold U., American Economic History (New York: Harper & Co., 1954), p. 366.Google Scholar

3 Primarily within economic development literature, there are two rather sharply divided sides to the terms of trade controversy. One side has relied primarily on a priori reasoning to argue for an inevitable deterioration in agriculture's terms of trade as development proceeds. Their reasoning relies heavily on a presumed difference in market structure in the two sectors and on a presumed low income elasticity for basic commodities. For example, see Owen, W. F., “The Double Developmental Squeeze on Agriculture,” American Economic Review, LVI (March 1966), 43–70Google Scholar; and Flanders, M. June, “Prebisch on Protectionism: An Evaluation,” Economic Journal, LXXIV (June 1964), 305–326.Google Scholar On the other side of the debate, development economists have questioned the above analysis by presenting estimates of the secular movements in the terms of trade which show no evidence of a general worsening of the price position of primary producers. For example, see Morgan, Theodore, “The Long-Run Terms of Trade Between Agriculture and Manufacturing,” in Betz, Morgan and Choudhry, , eds., Readings in Economic Development, (New York: Wadsworth, 1963), pp. 274–285Google Scholar; “The Terms of Trade of Less Developed Countries,” Foreign Trade Review, UNCTAD-II Special Number.

4 Bowman, “An Economic Analysis,” p. 320; North, Growth and Welfare, Ch. II; Shannon, Fred A., The Farmers Last Frontier (New York: Harper & Row, 1968), p. 294.Google Scholar Also see the discussion in Gallman, Robert, “Commodity Output, 1839–1899,” Parker, William N., ed., Trends in the American Economy in the Nineteenth Century, NBER, Studies in Income and Wealth, Vol. 24 (Princeton, New Jersey: Princeton University Press, 1960), pp. 28–29Google Scholar, (hereafter cited as Trends).

5 For excellent discussions of the various terms of trade see Haberler, Gottfried, A Survey of International Trade Theory, Special Papers in International Trade (Princeton University, 1955)Google Scholar, Chapter 4; Meier, Gerald M., International Trade & Development (New York: Harper & Row, 1963)Google Scholar, Chapter 3; and Viner, Jacob, Studies in the Theory of International Trade (New York: Allen & Unwin, 1955), Chapter IX.Google Scholar

6 An example of the shortcomings of the C index would be a high wheat price caused by a crop failure. If the price rise were less than the decrease in production, less total cloth, for example, could be purchased with the smaller wheat output. Similarly, if the same amount of inputs were used but now achieved lower total output, total factor productivity could decline enough to offset the higher price of wheat. The single factoral and income terms of trade overcome these problems at least in part. For an excellent discussion of the limitations of the various terms of trade measures see Baldwin, Robert, “Secular Movements in the Terms of Trade,” American Economic Review: Papers & Proceedings, XLV (May 1955), 259–269.Google Scholar See also the discussion by Kindleberger and Morgan, ibid., 288–293.

7 For a discussion of the conceptual problems see Baldwin, “Secular Movements,” pp. 264–265; Haberler, Survey, pp. 29–30; and Meier, International Trade, pp. 42–43.

8 Baldwin, “Secular Movements,” p. 265, correctly notes that the productivity index should be an appropriately weighted sum of all inputs, not just the average productivity of one input. Salter, W. E. G., Productivity and Technical Change, (Cambridge: Cambridge University Press, 1960), pp. 2–7Google Scholar, provides an excellent discussion of analytical, empirical, and interpretive problems in measuring productivity.

9 Farmers’ real incomes changed over time as a result of changes in relative prices, changes in productivity, changes in capital stock and by changes in the value of capital stock (capital gains). The commodity terms of trade account for only the first factor while the single factoral terms of trade also account for the second. The income terms of trade measure the impact of the third. Which measure is best depends, in part, on the questions asked.

10 Norton, J. L. and Wilson, B. B., Prices of Illinois Farm Products from 1866 to 1929, Illinois Agricultural Experiment Station, Bulletin 351, (July 1930)Google Scholar; Farris, P. L. and Euler, R. S., Prices of Indiana Farm Products, 1841–1955, Purdue University Agricultural Experiment Station, Station Bulletin 644, (1957)Google Scholar; Strand, N., Prices of Farm Products in Iowa, 1841–1940, Iowa Agricultural Experiment Station, Research Bulletin 303, (May 1942)Google Scholar; Mortenson, W. P., Erdman, H. H., and Drexler, J. H., Wisconsin Farm Prices—1841 to 1933, The University of Wisconsin Agricultural Experiment Station, Research Bulletin 119, (November 1933).Google Scholar

11 Individual crop prices vary considerably throughout the year but no attempt was made to weigh monthly prices by monthly marketings because of the lack of data on these marketings. The results should not be unduly biased however.

12 Bowman, John D., “Gross Agricultural Output, Value Added and Factor Shares in Twelve Midwestern States, 1870–1900,” Mimeo, August 1966.Google Scholar Copies are available from the authors upon request, along with other supporting data.

13 The shift in the weights between 1870–1900 illustrate the change in output composition that occurred in each of the four states. The changing importance of wheat is indicated by the value added weights attached to this crop for census years:

Using beginning year fixed weights would tend to over-represent crops that decline in importance over the period. On the other hand, crops that are increasing most rapidly in importance would tend to have lower prices over time and would tend to be increasingly under-represented. The resulting price index would tend to be higher than if variable weights were used. If ending year fixed weights were used, the bias would tend to be in the opposite direction. These problems are less severe if the relative importance of each item changed little over the time period covered.

14 Ethel Hoover, “Retail Prices after 1850,” in William Parker, ed., Trends. Warren, George and Pearson, Frank, Wholesale Prices for 213 Years, Agricultural Experiment Station, Memoir 142, Cornell University, (November 1932).Google Scholar Both were converted to an 1870 base to make them comparable to the farm price indices.

15 For a review of available budget studies see Williams, Faith M. and Zimmerman, Carl C., “Studies in Family Living in the United States and Other Countries: An Analysis of Material and Method,” U.S. Department of Agriculture, Miscellaneous Publication, No. 233, (1935).Google Scholar

16 One test for the adequacy of the two import price indices as a measure of the cost of farm purchases is possible using a farm cost of living study for Vermont. That study provided three series: “family living,” “used in production,” and an unweighted sum of the two. Despite the fact that the “family living” index is heavily weighted with food items, the indices can be used as a check on. the two price indices used as measures of changes in “import” prices. Annual values of the “family living” and combined series fall between the Warren-Pearson and the Hoover Series in most years while the “used in production” series falls slightly below these two in a majority. of years. This suggests that the two price indices used are a reasonable proxy for changes in the cost of farm purchases. Adams, T. M., Prices Paid by Vermont Farmers for. Goods and Services and Received by Them for Farm Products 1790–1940, Vermont Agricultural Experiment Station, Bul. 507, (February 1944).Google Scholar

17 Food and agricultural products carried weights of 50 percent in the Warren-Pearson and 57.4 percent in the Hoover Index. The Warren-Pearson index excluding agricultural products was recalculated for 1870–89. This resulting index was very similar to the original series. The heavy weighting of food items was therefore judged to introduce a very insignificant bias. The Hoover index, based on spending patterns of Massachusetts workingmen in 1875, is weighted 57.4 percent with food and 17.7 percent with rent, and both items present difficulties in accurately measuring farm income relative to nonfarm income. Hoover provides price series for 1851–1880 for all items less food and all items less food and rent in addition to the all-items index. Use of the first two narrower indices as measures of farm cost of living would have resulted in terms of trade indices more favorable for agriculture.

Some food items included in the Hoover index were undoubtedly purchased by many farmers. These include tea, coffee, fish, sugar, lard, molasses and syrup. Some farmers may also have purchased flour, dairy products and some meat. Other items. included are clothing (mainly represented by material), fuel and light, medical care, newspapers, soap and starch. Excluded are pianos which may have been an important part of the isolated farmer's entertainment expense.

Finally, the reader is asked to remember that food costs were a much higher percent of living costs in the nineteenth century than at present.

18 For a discussion of farmer complaints and railroad rates, see Higgs, Robert, “Railroad Rates and the Populist Uprising,” Agricultural History, XLIV (July 1970), 291–297.Google Scholar

19 Bowman, “Gross Agricultural Output,” Table I.

20 Primack, Martin L., “Farm Formed Capital in American Agriculture, 1850 to 1910” (unpublished Ph.D. dissertation, University of North Carolina, 1962).Google Scholar

21 Kendrick, John, Productivity Trends in the United States, NBER (Princeton, N.J.: Princeton University Press, 1961), p. 465Google Scholar, Table D-ll. Appendix Table I summarizes the state farm productivity indices and compares them to the Kendrick manufacturing series used to represent productivity in the non-agricultural sector. It is interesting to note that Iowa and Wisconsin display more rapid gains in labor productivity in agriculture than the overall manufacturing sector. This illustrates the too often neglected point that the agricultural sector can be a source of rapid growth over substantial periods of time. Kendrick's series is more limited in coverage than either of the “import” price series but it is of high quality and covers the industrial sector well. With the exception of mining, manufacturing was the fastest growing sector in terms of output per worker and accounted for 33 percent of commodity output in 1869 and 53 percent in 1899. Therefore, use of Kendrick's series may actually overstate actual productivity gains in the import sector resulting in lower double factoral terms of trade than if productivity in the non-agricultural sector were more accurately measured. The above figures are from Gallman, “Commodity Output, 1839–1899”, p. 26. The estimates of state agriculture labor productivity are rougnly consistent with the regional technological change index, for the ten USDA regions and the agricultural sector reported in Lester Lave, Technological Change: Its Conception and Measurement, (New York: Prentice-Hall, Inc. 1966), pp. 75–80.Google Scholar

22 Gallman, “Commodity Output, 1839–1899,” pp. 28–29, reported and discussed price indices of value added by producing sectors for 1839–1899. The series are especially interesting because they are based on value added and the prices used to construct the series come from some of the same sources used in this paper. The figures differ in that they refer to the entire country and, with one exception, are quinquennial and not annual. Comparing Galhman's agriculture and manufacturing series for 1869–99 provides a rough check on the trend in agriculture terms of trade reported in this paper. Gallman found that, “The prices of all three sectors rose sharply between 1839 and 1869 and fell thereafter. But mining and manufacturing prices fell much faster than agricultural prices. Further, toward the end, of the century agricultural prices were at about the level of the forties and fifties, while mining and manufacturing prices were much lower,” (pp. 28–29, footnote omitted). The quinquennial changes also agree roughly with the short term movements reported in the text; slight rise from 69 to 74, some fall in the late 70's, stability in the early 80's, fall in the late 80's, substantial improvement to 1894, and then a decline in the mid 1890's. Lipsey, Robert, Price and Quantity Trends in the Foreign Trade of the United States, NBER, Studies in International Economic Relations, No. 2, (Princeton, N.J.: Princeton University Press, 1963)Google Scholar, also contains information that can be used as a rough check on the import and export price series used in this study. In Appendix A, Lipsey presents price indices for U.S. exports by economic classes. The series for crude exports is quite similar to the constructed state farm price indices. The manufactured product export price series generally moves in a manner similar to the non-agricultural price series used in the text (see pp. 142–143).

23 The farm price indices used in this study are for individual states and therefore less aggregative than those used in previous studies of farm purchasing power between 1870 and 1900. The resulting terms of trade indices still mask considerable differences between individual farmers within these states. Using the data collected in this study, price indices for particular crops could be used to examine the relative changes in the purchasing power of farmers specializing in these crops.

24 This sharp peak is mainly due to high prices caused by crop failures in the U.S. and below average harvests in Europe. See Yemen, Thorstein, “The Price of Wheat Since 1867,” Journal of Political Economy, (December 1892), 80–81.Google Scholar

25 Other factors besides short-run fluctuations in the agricultural sector terms of trade were behind farmer discontent between 1870 and 1900. These year-to-year variations in farm purchasing power made the transition from less to more reliance on the market more difficult. In addition, farmers became increasingly aware of the relative isolation of rural life as urbanization increased. The relative decline of the agricultural sector had an adverse effect on the average farmer. Changing crop, mix, increasing optimum farm size, and increasing capital requirements made adjustments and adaptation necessary and fell more heavily on the small farmer. Those that were unable or unwilling to adjust suffered correspondingly. For a discussion of some qualitative aspects of farmer discontent see Mayhew, Anne,“A Reappraisal of the Causes of Farm Protest in the United States, 1870–1900,” Journal Of Economic History, XXXII (June 1972), 464–475.CrossRefGoogle Scholar Mayhew argues that the agrarian protest movement was in large part a reaction to the commercialization of agriculture.