HARD TIMES ON THE FARM, 1864-1896

The years from the close of the Civil War to the end of World War I include two contrasting periods in agricultural history. The first of these, from 1864 to 1896, was characterized by agricultural hardship and political unrest; the second, from 1896 until about 1920, represented a sustained period of improvement in the lot of the farm population. This improvement is reflected quantitatively in Table 15.3, which traces average annual percentage growth rates in real farm income over the last half of the nineteenth century. Note that real incomes did rise from 1864 to 1896, but the rate of increase seemed painfully slow, and the averages obscure the hardships suffered by many western farmers in the 1870s and 1880s.

American farmers, from the mid-1860s to the mid-1890s, knew that their lives were hard without being shown data to prove it. Conditions were especially hard on the frontier, where the combination of dreary surroundings and physical hardship compounded the difficulties of economic life, which included declining prices, indebtedness, and the necessity of purchasing many goods and services from industries in which there appeared to be a growing concentration of economic power.

TABLE 15.3 TRENDS IN FARM INCOME AND PRODUCTIVITY (AVERAGE ANNUAL PERCENTAGE CHANGE)

Source: Fogel and Rutner 1972, Table 2, 396, adapted by permission of Princeton University Press. © 1972 by the Center for Advanced Study in the Behavioral Sciences.

All prices were falling between 1875 and 1895, but as Table 15.4 shows, the price of farm products was falling relative to other prices. To put it slightly differently, the farmer’s terms of trade—the price of the things the farmer sold divided by the price of things the farmer bought—were worsening. This did not mean that real farm income was falling (recall that Table 15.3 shows that it was rising), because the terms of trade refer only to price and do not take productivity into account (for more on these issues, see Bowman and Keehn 1974). It does mean, however, that the farmer had to run faster just to avoid losing ground. By 1895, to take the low point in Table 15.4, the farmer had to produce about 16 percent more than in 1870 just to offset the fall in his terms of trade.

Why were the farmer’s terms of trade worsening? Part of the explanation is the rapid increase in the supply of agricultural products. All over the world, new areas were entering the competitive fray. In Canada, Australia, New Zealand, and Argentina as well as in the United States, fertile new lands were becoming agriculturally productive. In the United States alone (as Table 15.1 indicates), the number of acres in farming more than doubled between 1870 and 1900. Reinforcing this trend was the increased output made possible by mechanization.

Source: Historical Statistics 1975, Series E42, E53, and E135.

Notable changes occurred, too, on the demand side. One favorable influence on the domestic demand was the continued rapid increase in the population. After 1870, the rate of population growth in the United States fell, but until 1900, it was still high. In the decades of the 1870s and 1880s, the increase was just over 25 percent, and in the 1890s, it was more than 20 percent—a substantial growth in the number of mouths to feed. There was an offsetting factor, however: In 1870, Americans spent one-third of their current per capita incomes on farm products. By 1890, they were spending a much smaller fraction, just over one-fifth, and during the next few years this proportion dropped further. Thus, although the real incomes of the American population rose during the period, and although Americans did not spend less on food absolutely, the proportion of those incomes earned by farmers declined (in technical terms, the income elasticity of demand was less than 1 for most agricultural crops). See Economic Insight 15.2.

THE ENGEL CURVE

Offsetting these effects in part was the rise in the demand abroad for U. S. crops. Export demand for farm products increased steadily until the turn of the century. Wheat and flour exports reached their peak in 1901, at which time nearly one-third of domestic wheat production was sold abroad. Likewise, meat and meat products were exported in larger and larger quantities until 1900, when these exports also began to decline. Overall, the value of agricultural exports rose from $297 million in 1870 to more than $840 million in 1900. Exports of farm products during these decades helped expand agricultural markets, but they were far from sufficient to alleviate the hard times on the farm.

Farmers were not inclined to see their difficulties as the result of impersonal market forces. Instead, they traced their problems to monopolies and conspiracies: bankers who

The slow growth of demand for farm products reflected the slope of the Engel curve, named for nineteenth-century Prussian statistician Ernst Engel. Engel curves are usually based on samples of family budgets and show average expenditures on food (or

Other goods and services) at each level of income. Economic growth lifts the average family to higher income levels, but expenditures on food rise less rapidly, and the share spent on food falls. The farmer could retain his share of total spending only if the slope of the Engel curve for farm products were equal to the slope of the 45-degree line bisecting the figure.

Dollars

Expended

Raised interest rates, manipulated the currency, and then foreclosed on farm mortgages; grain elevator operators who charged rates farmers could not afford; industrialists who charged high prices for farm machinery and consumer goods; railroads that charged monopoly rates on freight; and so on.

The evidence of these alleged sources of distress is largely unsupported, suggesting that farmers were attacking symptoms rather than causes. Figure 15.2 shows that the prices of industrial items in the West fell relative to the prices of farm products; Figure 15.3 shows that freight costs also fell as a percentage of farm prices. This does not mean, of course,

FIGURE 15.2

Price of Industrial Goods in Terms of Farm Products, West and East, 1870-1910

FIGURE 15.3

Freight Costs on Wheat from Iowa and Wisconsin in New York as Percentage of Farm Price, 1870-1910

TABLE 15.5 REAL (NOMINAL) INTEREST RATES ON MIDWESTERN FARM MORTGAGES, 1870-1900

Note: The real rate is the nominal rate plus the rate of deflation or minus the rate of inflation.

Source: Derived from Williamson 1974, 152.

That every complaint of every farmer was baseless. Although long-haul railroad rates fell dramatically relative to agricultural prices over the period, for example, certain monopolized sections of railroad permitted discriminatory monopoly pricing on short hauls (for more on this, see Higgs 1970).

Finally, both in nominal and in real terms, interest rates charged on midwestern farm mortgages declined over the decades, as shown in Table 15.5. Such rates were higher than in the East, where capital was more plentiful and investments typically less risky, but they declined more rapidly in the West. Indeed, to the extent that farmers were suffering from monopoly prices in credit markets, it was the small western bank rather than the eastern financier who was to blame. This point was first made by Richard Sylla (1969) and John James (1976). Even here, however, subsequent research has narrowed the potential role of local bank monopolies in the credit problems of farmers (see Keehn 1975; Smiley 1975; Binder and Brown 1991). Farm mortgage rates, as well as short-term rates, were high, especially in the 1870s, but appear to have been a product of high lending risks and other causes rather than monopoly power (for more on this issue, see Eichengreen 1984; Snowden 1987).

Part of the explanation for agricultural discontent in this era was the process of commercialization and globalization that created a world in which the farmer was subject to economic fluctuations that he could neither control nor even fully comprehend. As emphasized by Ann Mayhew (1972), to keep abreast of progress, the farmer needed more equipment—reapers, planters, harrows—as well as more land and irrigation facilities. This often meant greater indebtedness. When agricultural prices fell, foreclosures or cessation of credit extensions brought ruin to many farmers. Farm prices, moreover, were increasingly subject to international forces. Farm prices could rise despite good weather and abundant crops in the United States and fall despite bad weather and poor crops. Everything might depend on events abroad, which the farmer could not directly observe. Robert A. McGuire (1981) has shown a strong correlation between political agitation in various western states and the economic instability of these states, and that price fluctuations had a particularly important bearing on the income instability of farmers.

Even though modern research has rejected many of the analyses put forward in the late nineteenth century, we need to take a close look at the political forces spawned by the farmers’ discontent, for the reforms proposed by the agrarian protesters helped shape the institutional framework of the American economy.