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Economic Variables and the Development of the Law: The Case of Western Mineral Rights

Published online by Cambridge University Press:  11 May 2010

Gary D. Libecap
Gary D. Libecap
Affiliation:
The University of New Mexico
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Much of American legal activity during the eighteenth and nineteenth centuries centered on the transfer of a continent of natural resources—agricultural land, water, timber, mineral deposits—from public to private control. That transfer was crucial for the development of an economic system based largely on private incentives and market transactions. Legal policy at both the state and federal level regarding natural resource ownership and use has been the focus of work by Paul W. Gates, Willard Hurst, Harry Scheiber, and others. Those studies have generally been aimed at describing the nature and impact of governmental support for private economic activities. This paper is concerned with a somewhat different question—the timing and emergence of particular legal institutions (laws and governments). The framework for the study is that offered by Lance Davis and Douglass North in Institutional Change and American Economic Growth. There they hypothesize that institutions develop in response to changing private needs or profit potentials: “It is the possibility of profits that cannot be captured within the existing arrangemental structure that leads to the formation of new (or the mutation of old) institutional arrangements.” Essentially the same model of institutional change is used by some American legal historians, notably Lawrence Friedman and Willard Hurst. They argue that the law can only be understood by examining the surrounding economic, political, and social conditions. Those conditions mold the law, and as they change, they force legal institutions to change. Friedman ties this view closely to the Davis-North model in A History of American Law, where he argues that competing interest groups are the primary determinants of the nature of the law at any one time. This view of legal institutional change is in sharp contrast to the common law tradition of legal history which sees the law as an autonomous institution passed on from generation to generation—an institution that molds the economic, political, and social inputs from society.

Type
Articles
Information
The Journal of Economic History , Volume 38 , Issue 2 , June 1978 , pp. 338 - 362
Copyright
Copyright © The Economic History Association 1978

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References

1 Gates, Paul W., History of Public Land Law Development (Washington D.C., 1968)Google Scholar; Hurst, J. Willard, Law and the Conditions of Freedom in the Nineteenth-Century United States (Evanston, 1956)Google Scholar; Hurst, J. Willard, Law and Economic Growth: The Legal History of the Lumber Industry in Wisconsin, 1836–1915 (Cambridge: Harvard University Press, 1964)Google Scholar; Scheiber, Harry N., Ohio Canal Era: A Case Study of Government and the Economy, 1820–1861 (Athens, Ohio, 1969)Google Scholar; Scheiber, Harry N., “Property Law, Expropriation, and Resource Allocation by Government: The United States, 1789–1910,” Journal of Economic History, 33 (March 1973), 232–51CrossRefGoogle Scholar; Nash, Gerald D., State Government and Economic Development, A History of Administrative Policies in California, 1849–1933 (Berkeley, 1964)Google Scholar; Iibecap, Gary D., The Evolution of Private Mineral Rights: Nevada's Comstock Lode (New York: Arno Press, 1978)Google Scholar.

2 A general conclusion from those studies has been that governments were active supporters of economic growth in the nineteenth century in the United States.

3 Davis, Lance E. and North, Douglass C., Institutional Change and American Economic Growth (Cambridge: Cambridge University Press, 1971), particularly chs. 1–4CrossRefGoogle Scholar.

4 Davis and North, Institutional Change, p. 59.

5 For example, see Hurst, , Law and Economic Growth, and Law and Social Process in United States History (Ann Arbor, 1960)Google Scholar; and Friedman, Lawrence M., History of American Law (New York, 1973)Google Scholar.

6 See Friedman, History, pp. 10–14, for an outline of the model.

7 The question of whether to view the law as largely evolving autonomously or as molded by external events is discussed by Robert W. Gordon, “Introduction: J. Willard Hurst and the Common Law Tradition in American Legal Historiography,” Law and Society Review, vol. 10, no. 1, pp. 10–11.

8 Couch, Bertrand and Carpenter, Jay, “Nevada's Metal and Mineral Production,” University of Nevada Bulletin, vol. 37, no. 4, Geology and Mining Series (1943), p. 133Google Scholar.

9 Calculated from statistics in Rothwell, Richard P., “Gold and Silver,” in Day, David T., ed., Report on Mineral Industries in the United States at the Eleventh Census (Washington D.C., 1890), pp. 33–42Google Scholar.

10 The development of mining law in Nevada and Colorado, both leading mining states, is discussed by Gary Libecap in The Evolution. For a discussion of American land law see Paul Gates, History of Land Law; for mining see Yale, Gregory, Legal Title to Mining Claims and Water Rights (San Francisco, 1867)Google Scholar, Shinn, Charles, Mining Camps: A Study in American Frontier Government (New York, 1948)Google Scholar and the Rocky Mountain Law Foundation, ed., The American Law of Mining (New York: Mathew Bender, 1974)Google Scholar. Paul, Rodman, Mining Frontiers of the Far West, 1848–1880 (New York, 1963)Google Scholar is a general study of western mining. Finally, John Umbeck has studied the rise of mining camps in the California gold rush: Umbeck, John, “A Theoretical and Empirical Investigation into the Formation of Property Rights: The California Gold Rush,” (Ph.D. dissertation, University of Washington, Seattle, 1975)Google Scholar.

11 This view of the development of property rights law benefits from the following studies: Buchanan, James, The Bases for Collective Action (Morristown, N.J., 1972)Google Scholar and The Limits of Liberty (Chicago, 1975)Google Scholar; Demsetz, Harold, “Toward a Theory of Property Rights,” American Economic Review 57 (May 1967), p. 350Google Scholar, Alchain, Armen and Demsetz, Harold, “Property Rights Paradigm,” Journal of Economic History, 33 (March 1973), p. 24Google Scholar; Stubblebine, William Craig, “On Property Rights and Institutions,” in Tullock, Gordon, ed., Explorations in the Theory of Anarchy (Blacksburg, Va.: Center for the Study of Public Choice, 1972), p. 11Google Scholar. Focusing on the net gain calculations of mine owners is the most direct way of understanding the motivation for the observed legal change in Nevada. The historical record shows that the mine owners were the major proponents of greater mineral rights guarantees. This is not surprising given the high expected returns from exclusive control. The record also shows that in most cases there was support by the general population for the legislation. Economic growth and increases in mine output were highly regarded by Nevada citizens, and there is little evidence of efforts at income redistribution. Similar findings regarding the general support of the population for private property rights and economic growth in other frontier areas have been reported by Hurst and Nash. Willard Hurst, for example, argued that Wisconsin timber law emerged in response to local needs; that the lumber industry was influential in its development; and that the community supported the desires of timber owners in exploiting the forest. See Willard Hurst, Law and Economic Growth, pp. x-xiii, 42, 159, 240, 264. Gerald Nash stressed the power of the California mine owners in the legislature in obtaining favorable statutes. He concluded that “promotion of private enterprise has been the most common characteristic in the relation of government to the economy … creation of the legal framework, to allow for incorporation, for agreements on contracts and trading procedures, and for establishment of a money system have been important. “Gerald Nash, State Government and Economic Growth, pp. 36–40, 350. In cases of conflict with other individuals Comstock mine owners had an advantage in the political process since, compared with the rest of the population, they were a relatively small and organized group whose interests often coincided. For a discussion of the effectiveness of small, organized groups see Olson, Mancur, The Logic of Collective Action (Cambridge: Harvard University Press, 1965), pp. 53–65Google Scholar.

12 Richard Posner ad Isaac Ehrlich argue that rules will be made more precise the higher the level of economic activity. “An Economic Analysis of Legal Rulemaking,” Journal of Legal Studies 3 (January 1974), pp. 257–86CrossRefGoogle Scholar. Individual rights must be clearly defined for an owner to enlist state support against violation of those rights since he must convince officials that a crime has been committed. See Posner, Richard A., “An Economic Approach to Legal Procedure and Judicial Administration,” Journal of Legal Studies 2 (June 1973), p. 408Google Scholar. See also, Tullock, Gordon, The Logic of the Law (New York, 1971), pp. 47–50Google Scholar.

13 The model places most emphasis on economic factors in the development of mineral rights law. Given the high expected returns from exclusive control and the lack of an existing ownership structure when ore was discovered, one would expect economic events to outweigh other social and political factors in the formation of the legal structure.

14 Warren Samuels discusses the interaction of legal and economic systems around the case of Miller et al. v. Schoene, in “Interrelations between Legal and Economic Processes,” Journal of Legal Studies (October 1971), pp. 435–50. A more general outline of legal-economic interactions in American economic development is given by Harry Scheiber, “Federalism and the American Economic Order, 1789–1910,” Law and Society Review, vol. 10, no. 2, pp. 57–117.

15 See also Gary D. Libecap, “Government Support of Private Claims to Public Minerals: Western Mineral Rights,” Business History Review, forthcoming. That article describes specific miners' rules, statutes, and court rulings and their impact on private mineral rights within the context of general government support for private economic activities in the nineteenth century.

16 Calculated from data in Smith, Grant, .”The History of the Comstock Lode,” University of Nevada Bulletin, vol. 37, no. 3, Geology and Mining Series (1943), p. 2Google Scholar.

17 Lord, Eliot, Comstock Mining and Miners, U.S. Geological Survey Monographs (Washington D.C.: Government Printing Office, 1883), p. 35CrossRefGoogle Scholar.

18 See Browne, J. Ross, Reports on the Mineral Resources of the United States, 1868, (Washington, D.C.: Government Printing Office, 1868), pp. 341–342Google Scholar.

19 Couch, Bertrand and Carpenter, Jay, “Nevada's Metal and Mineral Production,” University of Nevada Bulletin, vol. 37, no. 4, Geology and Mining Series (1943), p. 133Google Scholar. 1859 population from Grant Smith, “The History,” p. 2; 1860 population from the San Francisco Alta California, 14 November 1860.

20 Claim numbers from Grant Smith papers, Bancroft Library, University of California, Berkeley. Mining camp rules are found in Eliot Lord, Comstock Mining, p. 40.

21 For a more detailed discussion of mining camp rules see Gary D. Libecap, “Government Support.”

22 San Francisco Mining and Scientific Press, 29 September 1866.

23 Ibid.

24 There was also hostility toward the Mormon government in Utah which had official jurisdiction over the Comstock.

25 Journal of the Council of the First Legislative Assembly of the Territory of Nevada (San Francisco, 1862), p. 8Google Scholar.

26 For analysis of specific legislation, see Gary D. Libecap, “Government Support.”

27 Computed from data in the Grant Smith papers, Bancroft Library.

28 For example the Comstock Lode was divided into successive segments or claims, ranging from 10 to 2,000 feet in length along the vein. The underground boundaries between those claims were the vertical extensions of the surface end lines.

29 See Gary D. Libecap, “Government Support,” for a discussion of extra lateral rights.

30 See Gary D. Libecap, “Government Support,” for the calculation of litigation expenses.

31 Marsh, Andrew J., Official Report of the Debates and Proceedings in the Constitutional Convention of the State of Nevada (San Francisco, 1866), p. 412Google Scholar.

32 Sources reviewed included: Rocky Mountain Law Foundation, The American Law; Gregory Yale, Legal Title; Blanchard, George and Weeks, Edward P., The Law of Mines, Minerals and Mining Water Rights (San Francisco, 1877)Google Scholar; Charles Shinn, Mining Camps; and Rodman Paul, Mining Frontiers.

33 There is a certain amount of subjectiveness in the construction of indices such as these. The selection of pertinent statutes and verdicts and the ordinal comparisons between laws involve personal judgments. There may, accordingly, be minor differences in index values computed by different people, but the general pattern of legal change reported in the paper should not vary. In addition, weighting schemes could be used in constructing the index to reflect different magnitudes of refinement. One statute might refine existing legislation more dramatically than a subsequent law, yet under the procedure used in the paper both would receive 1 point for each category affected. Such a weighting scheme would reinforce the conclusions reported in the paper regarding the fall-off in legal activity after uncertainty was reduced since the major refinements occurred prior to 1868.

34 Eliot Lord, Comstock Mining, p. 42 for Gold Hill Rules. Statutes of the State of Nevada, sessions 1–8.

35 Regression analysis was used because both the historical record and the theory suggest a dependence relation between legal change and the independent variables mine output and the cumulative precision of the law. The equation estimated was Y = a + b1X1 − b2X2 + U where Y was the annual change in the precision of the law; X1 was the average value of mine output; and X2 the cumulative precision of the law. The coefficient b 1 showed the impact of mine output on annual legal change when the cumulative precision of the law was held constant, and b 2 showed the effect of the cumulative precision of the law when output was constant. The equation assumed a linear relationship between the variables, and there was no reason to believe that was not the case. Other forms of the equation, however, were tried with little effect on the results. For a discussion of the basic linear regression model see David S. Huang, Regression and Econometric Methods (New York, 1970).

36 To see how closely stock prices and average output were related, output figures and share prices were assembled for two leading mines, the Ophir and the Gould and Curry, between 1859 and 1868, and correlations were run. For the Ophir the correlation between prices and output was .74 and for the Gould and Curry .69. Stock price data were assembled for 1859 and 1869 from the following: Grant Smith papers, Bancroft Library; Jones Collection, Huntington Library, San Marino, California; J. Ross Browne, U.S. Mineral Resources, p. III ; San Francisco Bulletin, 21 April 1860, 21 July 1860; San Francisco Mining and Scientific Press, 30 November 1860; San Francisco Weekly Stock Circular, 27 December 1862. Stock prices for 1861 through 1866 from the San Francisco Alta California; 1867 prices from the Virginia City Territorial Enterprise; 1868 prices from J. Ross Browne, C.S. Mineral Resources. An average stock price for each year was computed for the correlation. Similarly, output data were collected for the two mines as follows: Ophir, 1859–1868, Grant Smith papers as adjusted in Gary D. Libecap, The Evolution; Gould and Curry, 1860–1867, calculated from figures in the San Francisco Mining and Scientific Press, 12 January 1867; 1868 value from Raymond, Rossiter W., Statistics of Mines and Mining in the States and Territories West of the Rocky Mountains (Washington, D.C., 1870), p. 64Google Scholar.

37 Trend functions such as the Gompertz, lognormal, and logistic can be used to describe economic activities which seem to be an adjustment to a long-run equilibrium. For example, Griliches and Mansfield use trend functions in the study of the adoption of technological change: Griliches, Zvi, “Hybrid Corn: An Exploration in the Economics of Technological Change,” Econometrica 25 (October 1957), p. 501CrossRefGoogle Scholar; Mansfield, Edwin, Industrial Research and technological Innovation (New York, 1968)Google Scholar. A similar study by A. D. Bain focuses on the purchase of consumer durables; see Bain, A. D., The Growth of Television Ownership in the United Kingdom Since the War (Cambridge: Cambridge University Press, 1964)Google Scholar. See also Lotka, Alfred, Elements of Physical Biology (Baltimore, 1925)Google Scholar; and Aitchison, J. and Brown, J. A. C., The Lognormal Distribution (Cambridge: Cambridge University Press, 1957)Google Scholar. The curves in Figure 1 were fitted to a Gompertz function. That function assumes that annual changes in the precision of the law are determined by the current precision of the law and the gap between the long-run equilibrium and the current level or dS/dt = ASt(lnS*-lnSt) where St is the cumulative level of precision for any year and S* is the long-run equilibrium. Regressions were also run separately for judge-made law and legislative enactments. For instance in the first case court verdicts, the dependent variable, was the difference of the natural logs of the current cumulative precision index for each year and the previous year's index (from column 4 of Table 1). The independent variables were a constant and the difference of the natural logs of the long-run equilibrium value and the current years index. The results of the two regressions are shown below. In those regressions the long-run equilibrium values were the cumulative index figures when annual changes in the law dropped to and remained at zero (the horizontal portions of the curves in Figure 1). For the courts that was 56 (1885) and for the Legislature it was 61 (1890).

38 Significant at the .01 level.

39 Significant at the .01 level.

40 Ophir price, Grant Smith, “The History,” p. 7; number of claims, Grant Smith papers, Bancroft Library.

41 Laws of the Territory of Nevada (1862), pp. 131–66.

42 Market value of the Ophir company calculated from stock prices listed in the 1862 San Francisco Mining and Scientific Press.

43 Report of the Auditor of the Territory of Nevada (Virginia City, Nevada, 1864)Google Scholar.

44 Returns from Bushnell, Eleanore, The Nevada Constitution (Reno, 1968), pp. 29–31Google Scholar, Angel, Myron, History of Nevada (1881: rpt, New York: Arno Press, 1973), p. 85Google Scholar, and Andrew Marsh, Reports of the Constitutional Convention, p. XIV.

45 See Gary D. Libecap, The Evolution, ch. 5.

46 U.S., Congress, Senate, Miscellaneous Documents, no. 21, 37th Cong., 3d sess., 1862–1863.

47 See Gary D. Libecap, The Evolution, ch. 7.

48 U.S., Congress, Senate, Congressional Globe,39th Cong., lst sess.,1865–1866, pp. 3916, 3952, 4016, 4054Google Scholar.