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Was the United States one economy or many before the Civil War?

This essay will seek to analyse whether the United States1 can be considered

an integrated economy or a collection of disparate states. Enshrined in theUnited States Constitution, Article 1, Section 8, Clause 32 stipulates the

prohibition of taxes and duties levied upon interstate commerce and the free

mobility of capital and labour, thus, laying the foundation for a single US

economy. However, from the time this article was written to the onset of the

Civil War, the United States was far from being a single, integrated market.

The criteria used to consider whether the United States was one economy in

the antebellum period is the extent of price convergence between different

regions and the distinctive nature in industrial structures and institutions3. This

essay has sought to go beyond conventional wisdom in merely believing that

price convergence is a sufficient condition for market integration owing to the

fact that processes beyond the realm of standard transactions and exchanges

may determine prices in specific areas. Also, according to Krugman (1993),

when trade becomes possible then if high-tech, high-wage industries are

subject to external economies then these industries will be concentrated in a

specific region and create divergence in industrial structures between the

region that does and does not possess these possibilities which implies that

different regions will consist of industrial structures as a result of

specialisation4.

This essay argues that the US, in its entirety, cannot be considered one

economy during this period given the significant differences between Northern

and Southern States.

1Henceforth known as the US.2The Commerce Clause3In terms of factors and output.4 For example, in the twentieth century, Silicon Valley

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Underlying the debate over market integration is the importance of

improvements in transport made during this period that permitted

specialisation and price convergence. In terms of Smithian growth, the greater

the potential market the larger the incentive to specialise5

. During this period,market potential was increasing owing to the urbanisation. This is confirmed

by the growth in urban population in the North from 5% in 1790 to 61% in

1860. Evidently, some goods can be categorised as untradeable owing to

their perishable nature or merely proving uneconomical to trade6.

Prior to the numerous innovations in the transport and communications sector

that permitted price convergence between different states in the US, physical

distance acted as a natural barrier to trade especially for low value goods.

Traders opted to remain in close proximity to their market in order to sell their

goods. This system permitted inefficient tradesmen to remain in business

while prices in different regions diverged owing to significant transportation

costs that precluded entry to regional markets. The need for greater

integration came to the fore in domestic circles as a result of the 1807

Jefferson Trade Embargo, which highlighted the structural weakness of

American industry that was unable to cater for the demands of a growing

economy7.

By the early nineteenth century several innovations in the transport sector

enabled greater price convergence between various regions in the US as

transport costs and duration times were drastically reduced. Canals were aprominent form of transport during this era. The Erie Canal (1825)8

dramatically reduced costs for transporting goods between the Mid-West and

5Made possible in the North through urbanisation in the period between

1790-1920 the urban population grew from 5% to 51%. By 1860 the NorthEast and Middle Atlantic possessed 61% of total urban population compared

with the 17% in the South.6 For example, dairy products.7 For example, the Iron industry.8 Between Lake Erie and the Hudson River

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Northeast, thus permitting greater price convergence. Canals reduced the

cost of shipping from around 20 cents per ton-mile in the 1810s to 3 cents per

ton-mile in the 1830s. Canals and other water systems possessed the

advantage over turnpikes in the sense that large amounts of cargo could becarried without the high-energy consumption associated with turnpikes9.

However, transportation costs remained substantial, hence, only goods that

could absorb these costs could plausibly use canals. The canal itself, as a

mode of transport, was rather inhibited given that not all areas were suitable

for canal construction owing to geographic and financial considerations. Thus,

the canal failed to integrate America on a national basis.

Moreover, the presence of coastal shipping and steam powered ships acted

as a method of transportation that overcame barriers to achieving factor and

price convergence; while also being advantageous over the canal system

owing to the extensive network of natural rivers and coastal regions endowed

to the US. Over the course of the nineteenth century steamboat tonnage

dramatically increased. As Fishlow (2000) states National tonnage increased

from 62 409 tonnes in 1830 to 640 906 tonnes in 1860. Within this mode of

transport, greater competition between carriers, as a result of the low entry

costs into the industry, helped to erode the transportation costs for goods that

could plausibly use a river to be transported.

However, no other mode of transport could eclipse the impact of the railway.

The ascendency of railroads played a prominent role in US attempts tointegrate its economy throughout the period in question. American ingenuity

was at the heart in the formation of a vast network of railways that grew

between 1830 to 185010. Entrepreneurs sought to minimise iron input and

tunnels to ensure maximum rates of return. The federal government also

9 By 1860, canal investments reached $200 million with a series of canalsacross the North but many failed to reach the returns made by the Erie Canal.10 By 1860 railroad mileage exceeded 30 000 miles and investmentamounted to $1 billion.

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played an instrumental role in assigning investment to new projects according

to Goodrich (1960) owing to the perceived financial and social rates of return

in allowing land value beyond city limits to rise. Throughout this period, rail

lines from the Eastern Seaboard to the Midwest were perceived to beextremely profitable ventures as investors sought to capitalise upon the

growing industry in the Mid-West states as companies sought to be closer to

primary resources in the West11; whilst rising productivity throughout the

antebellum period reduced railroad costs.

These improvements in US transportation helped overcome so many

domestic barriers to trade in the regions where these advancements were

implemented. According to Slaughter (2001), through the analysis of prices of

various commodities in several cities12, prices converged markedly in the

antebellum period across all regions while other factor prices such as wages

did not converge during this period owing to the presence of substantial

technological innovation13. However, this is disputed by Coelho and Shepherd

(1974) who calculated, using a far broader price index14 with a base year of

1860, that the cost of living varied considerably in the antebellum period

where the South remained cheaper to live than the North which is rather

surprising given the existence of British imports competing in both areas for

business along with the continual expansion of the Westward frontier

paralleled with improvements in transport. Therefore, given that improvements

in transport were heavily concentrated in the North, which enabled northern

states to become increasingly integrated. However, there existed significantdisparities between the North and South of the US.

11From 1850, food-processing plants were relocating to cities such as

Cincinnati due to the presence of railroads.12 Cities under consideration include Cincinnati; New Orleans; and New York13According to Margo (2000), real wage growth in the Northeast between1821-1860 amounted to 1.28% for common labour compared with 0.85% for

the South.14 Consider foodstuffs; rent; clothing costs; and fuel

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Furthermore, for the US economy to be considered one, specialisation

between regions would entail the creation of different industrial compositions

between regions. North (1961) postulates that over the course of the

nineteenth century, improved transportation enabled the Mid-West tospecialise in agriculture; the Northeast in manufacturing; and the South in the

production of raw cotton. This hypothesis has been frequently dispelled as

inaccurate owing to the apparent self-sufficiency of the South in agricultural

produce during this period. According to Fishlow (1964) the Mississippi River

was typically used to transport goods through the South to the North, which

does not suggest the existence of one, integrated, economy in the US15 given

that the only reason goods were transported to the South was due to the fact

that other, more direct, modes of transport were more expensive.

Additionally, during the antebellum period there was a lack of trade links

between the South and the North beyond the Norths demand for raw cotton.

In the antebellum period, the South was considered to be self-sufficient in

terms of agriculture while also producing raw cotton. Hutchinson and

Williamson (1971), through the analysis of various feeds and human

consumption to estimate demand and supply of farm produce, promote the

idea that the South was self- sufficient during this period. Furthermore, the

respective industrial structures of the South when compared with Northern

regions differ markedly and contribute to the income divergence during this

period16. Therefore, during the antebellum period the South appears to remain

rather independent apart from the need for raw cotton to be shipped along thecoast to Northeastern factories.

Whereas, the Mid-West and Northeast can be perceived as integrated owing

to the extensive transportation links between various markets. Those on the

15 By 1860 only 17% of Western foodstuffs were exported via New Orleans.16 According to Kim (1998), in 1840, around 90% of the labour force in theSouthern regions were employed in the agricultural sector compared to 71%

for the rest of the nation despite its declining importance in the Americaneconomy.

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Western frontier could economically sell their agricultural products in

Northeast markets while their respective factor endowments were used more

productively. Hence, throughout the antebellum period, manufacturing grew in

the Northeast whilst agriculture became outsourced to the Mid-West. Thisprocess was made possible through improvements in transport to enable the

shipment of demanded goods to desired locations. Niemi (1970) asserts, on

the basis of the 1820 and 1840 Census, the construction of the Erie Canal

brought about increasing employment in manufacturing in New York while

agricultural shares of economic activity in Ohio increased in this period.

Finally, the US cannot be considered integrated given the existence of two

competing economic systems between the South and North. The South

promoted the use of slavery as a means by which prosperity could be attained

in the antebellum period that was challenged by the North and the prosperity

of its free labour17. Also, political factors hampered efforts to ensure greater

integration as a result of Southern resistance to the Northwest Ordinance

while federally funded transportation links were vetoed on the basis of

constitutionality and sectional rivalries leading to some states possessing too

many canals and railroads whilst some states lacked the infrastructure

necessary to integrate.

It is apparent therefore that while the Northern regions were integrated, the

US cannot be perceived as one economy until after the Civil War. While the

criteria for determining integration has been satisfied for regions within theNorth, the South remained independent throughout the antebellum period.

Whilst the South was required to produce raw cotton for both Northern

factories and Britain, it did not experience the same specialisation forces that

came with the integration of markets through improved transportation and

communication networks witnessed in the North. This may be attributable to

17 Easterlin (1961) shows that in 1840 Northeast Income per capita as a

percentage of the US average was 135 compared to the Souths 76. In 1860,the figure for the Northeast was 139 compared to 72.

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the shortfall of immigrants entering America in the South when compared to

the North18; a deficient mass market consisting of a high proportion of slaves;

or the lack of large companies financing an integrated transport and

communications network due to low rates of return19

.

The seeds of discontent were sown between the North and South where the

apparent feeling of independence manifested in the lack of trade between the

two regions, which created two very disparate economies within one country.

Word Count: 1721

18 According to Taeuber and Taeuber (1958), in 1841-50 the South received

0.3% of immigrants compared with 92.9% in the North. By 1851-1860, theSouth received 0.8% compared with 94.4% in the North.19 According to Majewski (1996) when analysing Pennsylvania and Virginiarailway projects.

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Coelho P.R.P and Shepherd J. Differences in Regional Prices: The United

States, 1851-1880 The Journal of Economic History, (1974) 34 (3) pp. 551-

591

Easterlin R.A. Regional Income Trends 1840-1950In: Seymour HarrisAmerican Economic History New York (1958)

Fishlow A. Antebellum Interregional Trade Reconsidered American

Economic Review, (1974) 54 (3) pp. 352-364

Fishlow A. Internal Transportation in the nineteenth and early twentieth

century in Engerman S and Gallman R eds., 2000. The Cambridge EconomicHistory of the United States. London: Cambridge University Press

Goodrich C. Canals and American Economic Development 1st ed. New

York: Columbia University Press, 1961

Hutchinson W and Williamson S . The Self-Sufficiency of the Antebellum

South: Estimates of the Food Supply.The Journal of Economic History,

(1971) 31 (3) pp. 591-612

Kim S. Economic Integration and Convergence: US Regions, 1840-1987.

The Journal of Economic History, (1998) 58 (3), pp. 659-683

Krugman P. R Geography and Trade 1st ed. Cambridge MA: MIT Press,1993

Majewski J. Who Financed the Transportation Revolution? Regional

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Divergence and Internal Improvements in Antebellum Pennsylvania and

Virginia. The Journal of Economic History, (1996) 56 (4) pp. 763-788

Margo R. Wages and Labour Markets in the United States, 1820 to 18601sted. Chicago: University of Chicago Press, 2000

Niemi A. W A Further Look at Interregional Canals and Economic

Specialisation: 1820-1840 Expolorations in Economic History (1970) 7 (4) pp.

499-522

Slaughter M Does trade liberalization converge factor prices?Journal ofInternational Trade & Economic Development (2001) 10 (3) pp. 339-362

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Wiley (1958)