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Hard Driving and Efficiency: Iron Production in 1890

Published online by Cambridge University Press:  11 May 2010

Peter Berck
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Abstract

This paper shows that the best practice of American methods for producing iron in 1890 was slightly better than the methods employed in Great Britain. It argues that the difference in technique was not of sufficient magnitude to have any bearing on Britain's “decline” as an industrial power. Profits in America are shown to be quite large, and it is hypothesized that these profits arose because the Americans did not anticipate the growth in the demand for pig iron.

Type
Articles
Information
The Journal of Economic History , Volume 38 , Issue 4 , December 1978 , pp. 879 - 900
Copyright
Copyright © The Economic History Association 1978

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References

1 Carr, James Cecil and Taplin, Walter, History of the British Steel Industry (Oxford, 1962)Google Scholar.

2 See Bell, I. Lowthian, “Iron and Steel Institute in America in 1890,” Iron and Steel Institute Journal, 38 (1891)Google Scholar, and Bell, I. Lowthian, “Discussion of Mr. Potter's paper,” Iron and Steel Institute Journal, 30 (1887), 181Google Scholar.

3 Potter, M. R., “The South Chicago Works of the North Chicago Rolling Mill Company,” Iron and Steel Institute, 30 (1887), 163–79Google Scholar.

4 Alfred Marshall, Memorandum on Fiscal Policy of International Trade, House of Commons, No. 321, Sect. 1 (Nov. 1908).

5 Burn, Duncan L., Economic History of Steelmahng, 1867–1939: A Study in Competition (Cambridge, England, 1940)Google Scholar.

6 McCloskey, Donald N., Economic Maturity and Entrepreneurial Decline: British Iron and Steel, 1870–1913 (Cambridge, 1973)Google Scholar.

7 Phelps-Brown, E. H. and Handfield-Jones, S. J., “The Climacteric of the 1890's: A Study in the Expanding Economy,” Oxford Economic Papers, 4 (Oct. 1952)Google Scholar.

8 David, Paul A., “The Landscape and the Machine: Technical Interrelatedness, Land Tenure and the Mechanization of the Corn Harvest in Victorian Britain,” in McCloskey, Donald N., ed., Essays on a Mature Economy: Britain After 1840 (Princeton, 1971)Google Scholar.

9 Lindert, Peter H. and Trace, Keith, “Yardsticks for Victorian Entrepreneurs,” in McCloskey, Donald N., ed., Essays on a Mature Economy: Britain After 1840 (Princeton, 1971)Google Scholar.

10 McCloskey, Economic Maturity and Entrepreneurial Decline.

11 Frazier, B. W., “Economy of Fuel in Our Anthracite Blast-Furnaces,” Transactions of the American Institute of Mining Engineers, III, 1874–1875, 157–72Google Scholar.

12 Allen, Robert G., “The Peculiar Productivity History of American Blast Furnaces, 1840–1913,” this Journal, 37 (Sept. 1977), 605–33Google Scholar.

13 McCloskey's results about efficiency in 1890 differ from those presented here for three technical reasons and one more philosophical reason. In order to calculate his relative efficiency index A*, McCloskey needs to know that “a 1 percent increase in the iron content of the ore produced a roughly equal percentage increase in coke productivity”; but he actually presents data that show 1 percent more iron implied .70 percent change in coke productivity in 1887. A second technical problem was the way in which percentage changes were calculated. Together, these two technical problems are sufficient to reverse McCloskey's conclusion that in 1890 the British were ahead of the Americans. The third technical point, McCloskey's focus on the coke rate, is less easy to quantify. Both Allen and I found that factors of production other than coke were important. The last point is more philosophical. McCloskey compares average American and British practice. Average practice derives from how good new plants are (which is best practice), how numerous new plants are, and how many older plants are still in use. In this paper, only best practice is compared, which is to say that “failure” occurs when American furnaces are better than British furnaces of the same vintage. Details of these arguments are available from the author.

14 Lindert and Trace, in Essays on a Mature Economy.

15 For a more exact expansion of this idea, see the Appendix.

16 If anything, this number is far too high. The ratio was 1:2 for the wage rate, and (directly and indirectly) labor was probably 70 percent of the costs.

17 For example, $720,000/4 furnaces = $180,000; £73,500 o $4.86/£/(price of capital in England/price of capital in the United States = .75)/3 furnaces = $158,760.

18 U. S. Department of Labor, Sixth Annual Report of the Commissioner of Labor, 1891 (Washington, 1892)Google Scholar.

19 I. Lowthian Bell and Windsor E. Richards, “Discussion,” p. 180.

20 Ibid., p. 181.

21 The derivation of the cost of relining every I years for a total period of L years follows. R is the cost of one relining, and i is the interest rate.

22 Mitchell, Brian R., Abstract of British Historical Statistics (Cambridge, England, 1962), p. 455Google Scholar.

23 U. S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, 1960), p. 656Google Scholar.

24 Bridge, James Howard, Inside History of the Carnegie Steel Company (New York, 1903Google Scholar).

25 Bell and Richards, “Discussion,” p. 181.

26 Hard driving also may have saved capital in some ways less obvious than that of getting a large make from the same sized furnace. The records of the hard-driven Carnegie furnaces (Lucy and Isabella furnaces) show large yearly variations in output, presumably due to the instability of demand. Hard driving may have contributed to the flexibility necessary to produce iron for the unstable American rail market. Or, to the contrary, the variance (rather than the level) of output and, therefore, of driving may have been responsible for the “excessive” lining wear of American furnaces. Offsetting the possibility that the variance in driving rates was bad was the ability of the American-style furnaces to be driven as hard as 22 pounds of pressure when the furnaces were threatening to freeze up or “hanging.” It does not seem possible to choose among these speculative hypotheses:

27 Fisher, Franklin M., “Tests of Equality Between Sets of Coefficients in Two Linear Regressions: An Expository Note,” Econometrica, 38 (Mar. 1970), 361–66CrossRefGoogle Scholar.

28 The figure 2.6 million is 178 firms × (£10,800 for fuel + £4,000 for labor).

29 This calculation is based on the percent of firms in the sample with furnaces bigger than 200 inches across the bosh.

30 Temin, Peter, “The Relative Decline of the British Steel Industry, 1880–1913,” in Rosovsky, Henry, ed., Industrialization in Two Systems: Essays in Honor of Alexander Gerschenkron (New York, 1966), p. 138Google Scholar.

31 Temin, Peter, Iron and Steel in the Nineteenth-Century America (Cambridge, 1964Google Scholar).

32 McCloskey, Economic Maturity and Entrepreneurial Decline.

33 The yearly rental rate is the stream of payments whose present value equals the present value of the cost of replacement of the furnaces and linings. It is calculated as follows:

where C is cost of replacement every 25 years and

where W is the annual rental, so the annual rental rate at interest rate r is

34 U. S. prices were deflated by index; English prices, by an index of wages. Neither index is ideal; see Historical Statistics of the United Status, p. 115, and Mitchell, Abstract of British Historical Statistics, p. 343.

35 Economic theory suggests that the rigors of competition and the free entry of firms will drive economic profits to zero. Indeed, the iron industry was competitive in this period even though some of the blast furnaces, for example, Carnegie's Edgar Thompson Steel Works, were part of integrated steel firms sporadically participating in rail and armor plate pools. Temin gives the need to control impurities in iron to be used in Bessemer steel as the case of vertical integration in the steel industry; see Temin, Iron and Steel in Nineteenth-Century America, Chapter 7. There were barriers to entry in Bessemer steel, namely, large plant size and a patent pool that, given the need to control impurity content in iron, eventually became a barrier to entry in the production of iron for Bessemer steel. Nevertheless, there was an active market in Bessemer pig in 1889; and judging from the Report, there were at least several dozen potential participants in the market. On this basis, it would seem that the markets for iron of all types were competitive even though the steel markets often were not. Because of the nature of the steel market, the integrated firms were, as Bridge points but, making inordinately large profits, even when the iron input was valued at market prices. Thus, the owners of the integrated firms had two causes to rejoice: making iron was profitable, and participating in the oligopolistic steel industry was profitable.

36 Mitchell, Abstract of British Historical Studies.

37 The data came from the Report of the U. S. Commissioner of Labor. However, it does not include observations on capital costs; see U. S. Department of Labor, Sixth Annual Report of the Commissioner of Labor, 1891.

38 Diewert, W. E., “An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function,” Journal of Political Economy, 79 (June 1971), 497CrossRefGoogle Scholar.

39 Temin, Iron and Steel in Nineteenth-Century America.

40 Bell, “Iron and Steel Institute,” p. 172.

41 McCloskey, Economic Maturity and Entrepreneurial Decline, p. 116.

42 Theil, Henri, vPrinciples of Econometrics (New York, 1971), p. 138Google Scholar. For instance, to test the sum of two coefficients, A + B, the test statistic is

Since the Cov can be negative, the denominator can be substantially smaller than either Var (A) or Var (B).

43 See Fisher, “Tests of Equality.”