Southern Agriculture Lecture Notes PDF

Southern Agriculture Econ 311 Lecture #18 October 24  The harvest labor constraint A farmer without the labor to harvest the wheat was in a tough spot. Labor would be able to charge the farmer up to the value of the wheat in the field. If a farmer paid his labor the...

Southern Agriculture Econ 311 Lecture #18 October 24  The harvest labor constraint A farmer without the labor to harvest the wheat was in a tough spot. Labor would be able to charge the farmer up to the value of the wheat in the field. If a farmer paid his labor the value of the wheat, he would lose money on the crop. Since every farmer was in the same position at the same time, all the farmers faced the same problem.  Family Farms The solution was to plant only as much wheat as your family labor could realistically harvest. Farm sizes in the north tended to be around 70 acres in settled areas, and smaller as you moved west. These were “small family farms” because of the harvest labor constraint, not because of land policy.  Slavery One way to get around the harvest labor constraint was to bind labor to the farm or the farm owner. Slavery was legal in the south, but not in the north. As we will see, family farms in the south that did not use slave labor looked very similar to northern farms, at least in terms of size.  Tenancy Since wage labor was not dependable (in the sense that wages would skyrocket at harvest time), another option was tenancy. Farmers could rent or share-crop land they owned to other farmers, who would then work their land with their own families. Because farm building was so expensive, northern communities usually had a mix of farm owners and farm tenants, with an agricultural “ladder”. Successful tenants bought land and became farm owners.  Cotton The key to Southern Agriculture and the continuation of slavery is cotton. Unlike northern agriculture, which was dominated by small family farms, southern agriculture was dominated by a relatively small number of very large farms, growing cotton, and using slave labor.  Cotton Cotton output (thousands of bales): 1790 - 3 1800 - 73 1810 - 178 1820 - 335 1830 - 732 1840 - 1348 1850 - 2136 1860 - 3841  Pre- and Post-Civil War While cotton output expanded at a steady rate before and after the Civil War, the market for cotton matured in the 1860s. Cotton prices grew steadily into the 1840s and then levelled off. Prices spiked in the 1860s during the war, and then gradually trended downward from 1870 to 1900. All the tables and graphs in the today’s lecture are taken from Gavin Wright, Political Economy of the Cotton South  The market for cotton was driven by technological change in England. In the 1770s the English figured out how to spin cotton fibers into a much stronger thread, enabling cotton to be used in a much wider range of products. Underwear and sheets is how I usually think about it. There was an enormous demand for cotton products that wool and linen simply could not satisfy.  The Jet Stream Weather in North America is dominated by the jet stream. When the jet stream is to the south, the weather is colder; to the north, the weather is warmer; overhead and the weather is stormier. In the spring as the jet stream moves north, the south gets rain. In the late summer, the southern weather pattern grows dryer. Just the pattern than cotton needs.  Soil Types Soil Type also mattered, with alluvial soils being the richest. The “cotton belt” stretched along the south edge of the piedmont, the fall of the mountains, and into the Mississippi River valley.  Farm Size The southern farms were the biggest where the land was most productive. Median farm size in the north was about the same as mean farm size in the north. In the southern cotton areas, mean farm size was two or three times bigger than the median farm size.  Farm size Improved acres Mean Median South 135.9 70.6 alluvial 209.7 70.0 North 64.5 49.3 Ohio 72.2 64.8 The key here is, there was very little difference between the median farm in the north and south, it was the presence of a few large plantations that make the difference.  Wealth and Land distribution In the cotton south, there was a relatively small number very large farms. The most valuable 10% of farms in the south accounted for roughly 60% of total farm value, in the north the most valuable 10% of farms accounted for about 40% of total farm value.  Cotton and Slavery Cotton cultivation and slavery were closely connected. Cotton farms of larger than 200 acres, of which there were very few in the north, accounted for 82% of the cotton and 83% of the slaves in the south.  Cotton and Slavery Cotton cultivation and slavery were closely connected. Farms without slaves accounted for less than 10% of all the cotton grown in the south. Farms with more than 15 slaves accounted for over 70% of the cotton grown in the south. Most of the cotton was grown on large plantations with more than 15 slaves.  North vs. South There was a significant difference in the amount of implements and machinery on northern farms, but not on southern farms. As southern farms got bigger, they added more labor. As northern farms got bigger, they added more implements and machinery. On a per worker basis, northern farms were more mechanized. On a per acre basis, northern and southern farms were about the same.  Manufacturing This also appeared in the pattern of investment and employment in manufacturing in the north and south, as well as in measures of technical innovation like patenting. These measures demonstrate the regional pattern identified by Callender, with manufacturing concentrated in the Northeast, but growing in the Northwest.  Southern Land Banks Ala Callender, southern states did not need to invest large amounts in transportation, as they were already located along the Atlantic and had access to ocean borne freight networks. The southern plain was also relatively well served by slow moving, navigable rivers.  Banks Banks were tied to trade. While banks and bankers approached states in the northeast and asked for charters, and were willing to pay for them, in the south and west trade was not as well developed and states found it necessary to make investments in banks. Of course, the reverse is also true. Bankers found that they could induce states in the south and west to invest in their banks!  The Cotton Trade As cotton output expanded, so did cotton exports. Almost all exports were headed for Great Britain (a bit went to the Northeast). How was the movement of cotton across the ocean to be financed and conducted?  Cotton Factors British textile firms employed representatives in the United States called “factors.” Factors were representatives of the British firms who made contact with American cotton suppliers, usually individual farmers. Factors would make agreements with American farmers to ship their cotton to Britain. Rather than buying the cotton outright New Orleans, the farmer continued to own the cotton until it reached the textile firm.  Cotton Bills/Sterling Bills Cotton purchases were financed with bills of exchange, payable in Britain. The bills were payable in pound sterling, not in dollars. The cotton factor would authorize the farmer to draw a bill on the textile firm, typically for 75% of the anticipated market price of the cotton when it reached Britain. If the cotton price was 10 cents a pound, the farmer could draw a bill for up to 7.5 cents a pound.  The need for banks Because the bills were drawn in sterling, and the farmer wanted dollars, the farmer would take the bill to a local merchant and discount the bill. That is, the merchant would give the farmer dollars that were less than the face value of the bill at the current exchange rate (the discount). The farmer would receive the bank notes of the local bank. Before there were banks in the South, the farmer would receive either currency (gold and silver coins) or some other negotiable bond. Buying and selling sterling bills was complicated, and the implicit interest rate farmers started out paying was high. Cotton would be gathered up along the rivers in the South and shipped directly to Britain from southern ports. The cotton bills would be bought and sold by a network of banks. The focal point in the United States for cotton bills was New York. In fact, the New York Stock Exchange is located in the “Cotton Exchange” even today. Cotton bills were drawn on cotton mills in Britain and payable in sterling in Britain. Merchants who wanted to purchase goods from Britain could pay for the goods with a cotton bill, purchased with dollars in the United States. What was exchanged in the “cotton market” were bills of exchange, some payable in Britain and some payable in the United States. This was a market in bills of exchange as well as a market in cotton. The market for cotton bills was very large, remember the rapidly growing exports of cotton, and played a key role in developing the financial system within the United States. Part of the financial system served domestic production and exchange, buying wheat in the west and selling in the east. Part of the system served international production and exchange, selling cotton to Britain and importing manufactured goods from Britain. There was, however, just one market for bills, both for domestic and foreign exchange. Merchants who wanted to buy a cotton bill paid for the cotton bill with a domestic bill payable in the United States. The ability of the United States to shift part of the financing of the cotton trade to the network of banks in the United States, rather than relying exclusively on British credit, was a very important part of American institutional and financial development. The importance of the cotton bills to the financial system, including the banks, meant that when there were problems with cotton bills it affected the entire financial system. As we will see, this is what happened in 1837. Remember, that even though banks in the Northeast paid states to give them charters, in the South and the Northwest it was the states that took the lead in chartering and investing in banks Ala Callender, states had access to capital that private corporations did not.  Southern land banks Southern states, southern farmers, and British cotton textile firms all had an interest in starting up banks in the American south, which would allow local farmers and cotton factors access to credit on better terms. But the merchant community in the south was poorly developed. The south was a rural agrarian area that had not developed a network of large ports, with the exception of New Orleans.  Louisiana Perhaps it is not surprising that the first southern state to make investments in banks was Louisiana, which made its first bank investments in 1824. In all, Louisiana invested $4,400,000 in banks in the 1820s and early 1830s. Typically, the state would issue the bonds and use them to buy stock in the bank. The bank would then take the stock and sell it to investors in Britain. The bonds issued by Louisiana to purchase stock in the first bank it chartered were “full faith and credit bonds” of the state. That meant the state was ultimately responsible for paying the bonds and bondholders could go directly to the state for interest and principle payments. The bonds issued by Louisiana to all the other banks were different. The charter for the banks stated that the banks were responsible for paying interest and principle on the bonds, and that the state would only be obligated to service the bonds if the resources of the bank had been exhausted.  Several of the banks in Louisiana were actually organized by the Barings Bank of Britain. Barings would arrange to buy all of the bonds from the bank and sell them in Britain. So Louisiana state bonds were used to finance a privately owned bank. The bank would begin operation as a commercial bank, discounting bills of exchange for cotton. The profits of the bank and dividends on stock, would be used to pay the interest on the state bonds (the state actually was paid more in dividends than it paid in interest, until 1839)  The main line of business for the southern banks was discounting bills of exchange. But southern banks also made mortgages. Private individuals who wished to buy stock in the bank could do so by making a mortgage commitment. A mortgage is a kind of bond secured by the land of the borrower. Investors paid for their stock by promising to repay the mortgages. Stockholders in the bank had the opportunity to borrow more money. Stockholders in the Southern land banks already owned land. Rather than mortgaging their land for cash, which they then had to repay, stockholders mortgaged their land and received stock in the bank. They still had to pay off their mortgages, which they did month by month with cash payments, giving the bank a regular source of income in addition to selling bills of exchange. Investors in Britain and the United States were confident the banks would pay interest and principle on their bonds (the state bonds issued on behalf of the bank), because the bonds were backed by the value of the mortgages on cotton land. Good land for growing cotton was highly valued.  Land and Slaves Wealthy individuals who bought stock in the bank, and paid for it with mortgages on their cotton lands, were in a position to borrow more money to buy more land and slaves. Stockholders had privileged access to borrow. The connection between land, slaves, and cotton, therefore, extended to the banking sector. This would play an important role in the financial crisis of the late 1830s and the reforms of the 1840s.  Slavery persisted in the South, because property rights in slaves were secure, and continued to be secure. In the north, slaves were present in all colonies, but abolition began after independence and property rights in slaves were less secure in the north. Slavery was banned in the Northwest.  Kentucky As Virginia retained Kentucky when it ceded other western land claims, the area was unaffected by the Northwest Ordinance, and slaveholders were able to enter it freely. Nonetheless, despite the favorable prospects for slave-based agriculture in the bluegrass region, it was by no means obvious at the 1792 statehood convention that slavery was a logical choice for the state as a whole. The 1790 census identified only 1,855 slaveholders in Kentucky (in a total free population of 61,000), whose average holding was just 6.7 slaves. Large parts of Kentucky had virtually no slaves.  Despite these bases for opposition, Kentucky slaveowners were far better represented and better focused on their goals than were their opponents at the 1792 convention. Ninety percent of the delegates owned slaves, two-thirds of them holding five or more. Slavery was the only convention issue contentious enough to require a roll-call vote, on which the antislavery amendment was defeated by 26-16. (The leaders of the antislavery faction were a group of seven ministers, but the only lasting effect of their effort was a constitutional prohibition on ministers serving in the legislature)  Political Viability Slavery was politically viable in the United States as long as the issue of slavery was about “property.” When the issue was about “slavery” political support was less secure. We are not going to talk about the Civil War this semester, we are focusing on the reasons that states invested in financial and transportation infrastructure in the 1820s and 1830s, and the impact that had on institutional development in the states in the 1840s and 1850s. But the crisis in Southern state finances in the late 1830s and early 1840s was connected to the decreasing value of cotton land in that time period. The Southern states did not borrow to build canals in the 1820s and 1830s, they had a good river system sufficient to get their cotton to the Gulf of Mexico or the Atlantic Ocean and thus to Britain. But they did borrow to establish banks, and while these banks were commercial banks that dealt in bills of exchange, they were also land banks that enabled stockholders to purchase land and slave using mortgages. When the value of Southern cotton lands began to decline in the late 1830s, some cotton growers found themselves “under water:” the value of their mortgage obligations was greater than the value of their land and slaves. Many of these stockholders stopped making their mortgage payments. Along with disruptions in the market for cotton bills, this led to bank failures throughout the South in the early 1840s. When the banks failed they stopped making interest payments on their bonds, and the bond holders began looking to the states to service the bonds. The states refused to until the banks had exhausted their assets, which meant selling the land that the banks acquired when they foreclosed on the mortgages they held. This was a long and complicated process, since the land owners who had signed the mortgages to buy stock in the banks were, by and large, wealthy and powerful people. As we will see later, several Southern states did not just default on their debts (that is they stopped making regular interest payments) but repudiated their debts. They refused to pay any interest or repay any principle. Why they did so was complicated, but part of the reason was that taxpayers were unwilling to increase their taxes to repay the interest and principle on bonds that had gone to buy land and slaves for a wealthy minority of citizens.