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Investment in Fixed and Working Capital During Early Industrialization: Evidence from U. S. Manufacturing Firms

Published online by Cambridge University Press:  03 March 2009

Kenneth L. Sokoloff
Kenneth L. Sokoloff
Affiliation:
Assistant Professor of Economics, University of California, Los Angeles, California 90024, and Faculty Research Fellow, National Bureau of Economic Research.
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Abstract

This paper utilizes a survey of U. S. manufacturing firms from 1832 to investigate the structure of manufacturing investment during early industrialization. The relative magnitudes of investments in fixed and working capital, and how they varied with firm size, location, and industry, are documented. This variation across industries in the composition of capital investments is indicative of a more general variation in factor intensities, and bears on the issues of why industries became concentrated in the regions they did, and the degrees to which they were adversely affected by the limited availability of long–term loans. Evidence that most manufacturing industries had quite modest investments in machinery and tools per unit of labor is also presented, serving to undercut the notion that the early period of industrialization was based on a proliferation of new, machinery–intensive technologies.

Type
Papers Presented at the Forty-Third Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 44 , Issue 2 , June 1984 , pp. 545 - 556
Copyright
Copyright © The Economic History Association 1984

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References

1 See, for example, Field, Alexander J., “On the Unimportance of Machinery,” unpublished manuscript.Google Scholar

2 Pollard, Sidney, “Fixed Capital in the Industrial Revolution in Britain,” this Journal, 24 (09. 1964), 299–314.Google Scholar Cotton textiles appears to have been the only manufacturing industry in the United States to have drawn significantly on long–term loans during the period. See Davis, Lance E., “Sources of Industrial Finance: The American Textile Industry, A Case Study,” Explorations in Entrepreneurial History, 9 (04 1957), 189–203;Google Scholar and Porter, Glenn and Livesay, Harold C., Merchants and Manufacturers (Baltimore, 1971).Google Scholar

3 For a more extensive discussion of the data and the sample, see Sokoloff, Kenneth L., “Industrialization and the Growth of the Manufacturing Sector in the Northeast, 1820–1850,” unpublished Ph.D. dissertation, Harvard University, 1982.Google Scholar The McLane Report appears in U.S. House of Representatives, Documents Relative to the Statistics of Manufactures in the U.S., 2 vols., Serial Set Nos. 222 and 223 (Washington, D.C., 1833).Google Scholar

4 The chief problem with the valuations of fixed capital in the McLane Report is that some firms may have reported the gross or original value rather than net value. Although of some concern, the resulting overstatement of the capital values does not appear to have been severe. When dummy variables for firms established in 1830 or 1831 were included in regressions similar to those presented in Table 2, the coefficients always proved insignificantly different from zero. Other evidence that points to the use of net value measures of the capital stock includes the comments of manufacturing establishment proprietors on their reports to the enumerators for the 1820 Census of Manufactures. Also see Robert Gallman, “How Do I Measure Thee? Let Me Count The Ways: Investment, Capital, and Wealth in the Nineteenth Century,” paper presented to Caltech/Weingart conference on The Variety of Quantitative History, March 1983.Google Scholar

5 The quoted description of the inventories to be reported by Group II firms suggests that “cash on hand” was not to be included. No adjustment for this omission has been made, but this feature of the data may partially explain why Group I firms seem to have had relatively greater investments in inventories.Google Scholar

6 A comparison of the Group II estimates with the U.S. figures from the 1890 Census of Manufactures (which contains information on both inventories and accounts receivable) indicates that all of these industries except wool textiles experienced declines in their working–capital shares over time. For example, the share decreased from 39.5 percent to 34.8 percent in cotton textiles, and from 77.3 percent to 65.0 percent in hats. U.S. Census Office, Eleventh Census of the United States: 1890. Report on the Manufacturing Industries in the United States (Washington, D.C., 1895).Google Scholar

7 In 1850, for example, the average number of employees per New England firm was 112.3 in cotton textiles, 37.8 in wool textiles, 7.7 in coaches/harnesses, and 4.3 in tanning. U.S. Census Office, Abstract of Statistics of Manufactures (Washington, D.C., 1858).Google Scholar

8 These figures may understate the value of the machinery and tools in use in some industries, such as shoes, because employees may have worked with their own tools. No reasonable adjustment for this phenomenon seems likely to alter the qualitative result.Google Scholar

9 The qualitative results of these regressions are not sensitive to whether one includes the estimates of accounts receivable in the total investment and working capital figures. Regressions with estimated accounts receivable per unit of labor as the dependent variable suggest that this component of working capital also grew more rapidly than did fixed capital with firm scale of production. The principal findings also hold if the regressions are estimated over the Group I firms or if the labor input is measured without allowing for entrepreneurial labor.Google Scholar

10 It was evidently common practice for merchants to extend short-term loans to manufacturers and to pay for goods at some time after delivery. They frequently sold manufacturing output on commission or consignment. See Porter and Livesay, Merchants and Manufacturers, for details.Google Scholar

11 See Goldin, Claudia and Sokoloff, Kenneth, “The Relative Productivity Hypothesis of Industrialization: The American Case, 1820–1850,” Quarterly Journal of Economics (forthcoming).Google Scholar