Jeff’s Blog #23: Making America Safe for Industrialization

Last week I wrote about development in the context of  so-called Third World countries. In many cases, like those I discussed, richer countries play a commanding role in directing the development trajectory of poorer countries. But a different category of development is the one where the developing country remains in control of its own destiny. Sometimes this occurs because the developing country manages to reject offers of outside help, rejects imports, copies technology from richer countries, and forces itself to develop industries capable of exporting to the rest of the world. This is roughly the story of Japan, South Korea, and Taiwan as told in How Asia Works. In that book, the author makes a few offhand comments about how America’s development strategy was actually quite similar to that of the Asian Tigers. The famous example here is Alexander Hamilton’s “Report on Manufactures,” where he laid out a gameplan for stealing as much industrial technology from the British as possible. And then there is the story of Francis Cabot Lowell visiting British textile mills and committing their blueprints to memory so as to replicate them in Lowell, MA.

There is actually a direct lineage between the American and Japanese cases. Friedrich List was a German economist who came to America, studied Hamilton and other protectionist policies, returned to Germany, theorized a blueprint for how a country should develop, and helped implement the Zollverein customs union, arguably the first stage of unifying the German states. Toward the end of the 19th century, Japanese economists discovered List’s writing and planned their own development strategy around it.

But one thing you notice from the East Asian development stories is that while most people end up better off in the long term, it’s a very disruptive and unrewarding process in the short term. People are coerced to move from farms to factories, the new urban working class is mistreated, and inequality skyrockets. For these reasons, it’s conventional to think of development as a bitter pill that an enlightened autocrat forces his country to swallow. This raises an interesting question: how does development ever happen in a democracy?

Chinese workers building the Union Pacific railroad
Courtesy Alfred A. Hart Photograph Collection, Stanford University

Is democracy compatible with development? This is the motivating question for Richard Bensel’s book The Political Economy of American Industrialization, 1877-1900. This is a detailed book about some wonky topics in a forgotten era. And yet it was one of the most satisfying books about American history and politics I’ve ever read. Maybe too satisfying. Bensel’s project is to explain how the first industrial corporations became so rich and powerful without provoking a populist political revolt. The protagonist is the dominant, development-minded Republican Party. The answer to the question is, broadly, sectionalism: while industrial workers in the East and Midwest fought against their corporate bosses bitterly in local politics, they were content to screw over the South and West in national politics.

I’ve seen very few books that do a better job dealing with politics and economics simultaneously than this one. Bensel’s approach is to look at the most important Republican Party policies and discern which were important for jumpstarting corporate expansion, which were important for holding the political coalition together, and which were good for both. He attributes to the Republican Party a brilliant three-pronged strategy entailing the protective tariff, the gold standard, and the creation of a national market.

Let’s start with the tariff because it was the most widely discussed political issue of the time. The basic story is that the U.S. charged high tariffs on foreign goods of all types: sugar, wool, iron, steel, tin, tea, etc. The specific items changed from tariff bill to tariff bill, but it was a lot of stuff and the tariffs were high, often in the 50% range. Historians and economists used to debate the economic effects of protectionism, with the predominant view being that tariffs are bad because they make these products more expensive for everyone even while benefitting some producers. But Bensel’s clever move is to say: it doesn’t matter whether the tariff was efficient. What matters is that it created a huge political coalition. It’s clear why Northerners were part of this coalition; they were the ones making industrial products. But Southern and Western farmers hated the tariff: they had to sell their products on an open world market while paying inflated prices on domestic goods. To win some Western farmers to the cause, Republicans added a single agricultural product to the tariff: wool. So now sheep-raisers and wool producers joined the coalition. To further broaden the coalition, Republicans specified that Civil War pensions would come out of the tariff’s revenue. So now Union veterans, many scattered throughout the West, had a reason to accept the tariff too.

Bensel argues that the political “surplus” earned by the popular tariff worked to “subsidize” the two less popular but more economically crucial policies for propping up the new industrial corporations. One was adherence to the gold standard. This is a major rabbit hole of a topic, but suffice it to say, for now, that there were two important things about the gold standard: (1) it encouraged foreign, and especially British, investment in American companies, and (2) it was deflationary, which was good for investors/creditors in the East and bad for mortgage holders in the South and West who would like their debts inflated away. Opposition to the gold standard was central to the populist third-party challenges of the era. One was the Greenback Party, which I love for their populist, social democratic platform, although they were probably too early on calling for the U.S. to move to fiat currency. And then bimetallist ideology (adding silver to the gold standard, which would have allowed at least a one-time inflation) permeated the Democratic Party, culminating in William Jennings Bryan’s nomination in 1896 (if you’re not familiar with The Wizard of Oz as allegory for bimetallism, go look it up). Understanding the interplay between the tariff and the gold standard has helped unlock the politics of this period for me. For example, it now makes sense why Grover Cleveland was the only Democrat elected between the Civil War and Woodrow Wilson. He was from New York, and New York was the only part of the country that opposed the tariff (as a trading hub) but also supported the gold standard. It, and Cleveland, played a tenuous balancing role between the interests of North and South. Bensel claims “Of all the major commercial cities in the world…New York may have been the most politically and culturally alienated with respect to the remainder of the nation in which it was located.”

The final, and in Bensel’s view most important, leg of the economic policy stool was the creation of a national labor market. This basically means restricting the ability of the states to regulate business and thus allowing large corporations–especially railroad corporations–to grow on the national scale. This is a story that played out in the courts, culminating in Wabash v. Illinois (1886), which overruled Munn v. Illinois (1877) in ruling that the states may not regulate interstate commerce. Bensel agrees with Alfred Chandler’s classic account, The Visible Hand, that the railroads were the key drivers of industrialization in this period. But he doesn’t persuade me that the states were on a path to limiting the viability of national railroads in the absence of these court cases. Nor does Richard White’s book Railroaded, which portrays the Western railroad companies as successfully buying every politician and judge they encountered. This excellent review of Bensel’s book offers some more skepticism that the “national labor market” was so crucial to economic development in the era while suggesting several other factors including cheap land.

But even in remaining undecided on Bensel’s specific claims about interstate commerce, I am very sympathetic to his broader point that the most important pro-development policy is often crafted not in the legislature but in the courts. To return to the original question, this is one way democracy becomes compatible with development: by vesting development responsibility in the least democratic branch of government. The most famous articulation of this argument came in Morton Horwitz’s 1977 book, The Transformation of American Law, 1780-1860. Horwitz shows that in the antebellum period, U.S. state and local governments chose to promote economic growth primarily through the legal rather than tax system. His clever move is to shift attention away from constitutional law, which everyone writes about (including Bensel’s argument about the importance of the courts), and instead focus on private law: property, contract, tort. Constitutional jurisprudence is only “the naysaying function of the law,” but private law governs the everyday business of capitalism.

Before showing the specific changes in 18th century legal doctrine, Horwitz documents a shift in judges’ basic orientation. Early American judges inherited a British common law tradition that found authority in customary ways of doing things. Those customs, in turn, were often rooted in a sense of natural law, or fixed rules of moral behavior with an ultimately divine provenance. For example, the common law approach emphasized a traditional agrarian conception of property as something an owners should be able to enjoy undisturbed by encroaching neighbors. If you asked a common law judge why, the only sensible answer is that’s how  it had been for a long time. But Horwitz identifies the rise of a new attitude he calls “legal instrumentalism,” where judges start thinking about how their decisions will affect commerce in a growing nation. Judges start writing things like “the benefit which always attends competition” or “as Professor Smith says in his Wealth of Nations…” or  “Consider the effect on the whole community.” This is a fundamentally legislative version of jurisprudence.

Horwitz shows that legal instrumentalism was not a neutral system: it consistently sided with capitalists seeking to develop property, displace older landholders and businesses, enforce exploitative contracts, and borrow money, all in ways that would have been offensive to common law principles. In property law, developers won the right to build a mill even if it diverted water from downstream fisherman or flooded the fields of adjacent farmers. Landholders were forced to bear the costs of public works; when road construction damaged the foundation of someone’s house, the judge ruled that “the risk of consequential damage was already discounted in the price originally paid for a piece of land.” Whereas public nuisance doctrine once protected people harmed by construction, the rise of a new “gross negligence” standard made builders liable only for carelessness, not run-of-the-mill damage. The first corporate charters had been public projects, usually canals or bridges or toll roads operating at the pleasure of the state. But judges came to see the value of competition, most famously in the Charles River Bridge case. The city of Boston had granted a charter for a toll bridge to Charlestown. But then they hired a second company to build an additional, non-toll bridge. The first bridge sued, claiming the charter had implied an exclusive right to operate a bridge. Chief Justice Roger Taney eventually ruled against the original bridge on narrow grounds that there is no implied exclusivity in a corporate charter, but his private memos suggest his main motivation was that the second bridge was good for economic development. Which was by then, apparently, a good enough reason. Little did he know that Ben Affleck would use the multi-bridge system to escape after bank heists.

Horwitz summarizes the changes in the antebellum period like this: “Law, once conceived of as protective, regulative, paternalistic and, above all, a paramount expression of the moral sense of the community, had come to be thought of as facilitative of individual desires and as simply reflective of the existing organization of economic and political power.” The irony is the contrast between this utilitarian character of private law and the principled, formalistic cast of public law in the same period, which protected property rights from the state. For example, eminent domain law became more conservative just before the Civil War, after plenty of land had already been seized for canal and railroad companies. The upshot, Horwitz thinks, was the justification of upward redistribution in the private market while protecting against downward redistribution by legislatures. In the second volume of Transformation, Horwitz examines the Progressive Era’s challenge to pro-business antebellum law. I will be interested to see whether some other judicial ideology replaces legal instrumentalism, and why.

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