The Dawn of Innovation (42 page)

As Japan has painfully shown, generally falling prices now tend to be associated with stagnation or depressions. But in the 1870s, wholesale prices fell by about 25 percent, the population grew by about 25 percent, employment grew by 40 percent, and real output grew by a blazing 67 percent. All real indices were up strongly. Fuel consumption doubled, metal consumption tripled, and the real value of manufacturing output was up by 40 percent. Food production showed the same picture. Home consumption of grains and cotton rose by half, and per capita beef consumption increased by 40 percent. Wheat exports were up 250 percent, and beef exports rose eightfold. Total agricultural exports more than doubled, and railroad freight loadings were up strongly. At the end of the decade, Amer-icans
were better fed, better clothed, and better educated, with bigger farms and higher output, and with access to a much broader range of products like stoves, washtubs, new farm machinery, and much else. Real growth in the decade, at 6.2 percent, is among the fastest in the country's history, although real people, it seems clear, mostly felt awful.
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The evidence suggests a “supply shock,” a rare event on an economy-wide basis. Supply shocks frequently occur in individual commodity markets: the recent success in exploiting large shale-based natural gas fields in the United States has sent natural gas prices plummeting and may ultimately affect all fossil-derived fuel prices. But a supply shock in a large nation that occurs more or less across the board implies a far-reaching increment in national capacity.

A reasonable speculation is that in the United States, after the Civil War, the combined impact of a deepened national transportation network and the spreading application of mechanized, rational production methods to every kind of industry triggered new economies of scale, in both production and distribution, across a wide swath of industries. Both factory productivity and labor productivity registered a sharp jump upwards in the mid-1870s and maintained that level for the rest of the century.

The jump in per capita output is consistent with the large accretion of capital in the United States in this period. Per capita consumption roughly doubled from mid-century to 1900, but savings increased by two and a half times, to nearly 30 percent of household incomes by the century's end, possibly its highest ever. The country's capital stock tripled from the Revolution to 1799, but from 1800 to 1860, it multiplied sixteenfold
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albeit from a relatively small base, and then grew another eightfold from 1860 to 1910. Over the entire run, American capital stock increased 388 times, and compared to Europe's, it was much newer.
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The falling prices seen
throughout the economy were especially sharp in capital goods, like machinery and tooling, which further amplified the impact of increased savings and rising capital investment. Since the transportation sector was by far the most capital-intensive of the day's industries, as well as a major productivity enhancer, a virtuous circle of savings, investment, and greater productivity came to dominate the entire economy.
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The increase in capital was paralleled by a great expansion of American territory, and continued strong population growth. But although the population tripled between the Civil War and the eve of the First World War, the stock of capital per citizen continued to grow. Finally, the contribution of immigration to American population growth was generally strong in this era, and immigrants punched above their weight. They were disproportionately young adults with few dependents—adventurous risk takers who had come to work.

Great Britain, in the meantime, continued to grow at about its long-term rate, or roughly 2 percent, while United States grew twice as fast. A curve of a steadily compounding advantage sufficiently prolonged inevitably starts to turn in a near-vertical direction. Sometime in the last quarter of the nineteenth century, the United States moved past Great Britain on nearly all major economic indicia, and by the eve of the First World War, US output was larger than that of Great Britain, France, and Germany combined.

That takes us to the close of the main portion of the story: how America built the economic platform that allowed it to replace Great Britain in the global economic catbird seat. To bridge the gap between the creation of the platform and the climactic event, the next chapter is a compressed account of the vast American industrial expansion in the second half of the century.

T
HE 1886 BLOOMINGDALE'S CATALOG—160 PAGES, STUFFED WITH SOME 1,700 products, from ladies' corsets to pistols—advised its clients to send a follow-up inquiry if they had not received an order confirmation within ten days after they had posted it, but to allow fifteen days if they lived on the Pacific Coast. Consider the billions of investment that underlay that offer. Just twenty years before, at the end of the Civil War, there had been only a few hundred miles of railroad track west of the Mississippi. Even in the 1870s, vast regions of Bloomingdale's 1886 catalog market had been reachable only by wagon train. But by 1886, the backbone of the national rail system was already in place, along with fast-freight forwarding companies, telegraph-based delivery tracking and financial settlement systems, insurance, and newly invented bills of lading that guided a delivery through the railroad maze.

And therein lies the secret of the American surge in per capita growth. It wasn't advanced technology. Throughout the nineteenth century, Americans were students to the British in steelmaking and most other science-based industries. Where the Americans wrote the rulebook, however, was in mass production, mass marketing, and mass distribution. The great nineteenth-century American economic invention, in short, was the first mass-consumption society. The invention proceeded in stages. The first was to create the infrastructure for a continent-wide, first-class economic power.
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Railroads and the telegraph were symbiotic businesses. The roads offered clear graded routes for stringing telegraph lines, and station managers conveniently doubled as telegraph operators; the benefit for the roads was that the telegraph, for the first time, allowed them to track and manage their far-flung freights and rolling stock.

There were other, less obvious symbioses. The western railroads were typically built far ahead of traffic—“If You Build It, They Will Come.” The roads benefited from both state and federal land grants in wide swaths on both sides of their tracks. In order to create future freights, they frequently transferred their land to farmers on highly advantageous terms. Much of the early risk capital came from the British, who regarded American railroad bonds as the equivalent of today's high-yield paper: defaults were to be expected, but the returns were still attractive. So the railroads opened the great American grain belt west of the Mississippi, and innovative factory-farmers created a Saudi Arabia of food.

It was a prodigious accomplishment but deeply flawed: thousands of miles of track were poorly constructed, curves were dangerous, bridges flimsy. Even today's takeover titans might be embarrassed at the reckless financial leverage at many of the lines. Speed to completion and revenue collection were the constant imperatives. Leverage drove behavior in other ways. With huge volumes of shares and bonds in play, takeover battles raged around nearly all the lines, exhausting the resources of courts and grinding up investor dollars. The takeover wars were yet another accelerant for the track laying: you achieved local dominance, and earned the cash for debt service, by controlling access to all the prime business centers. So expansions proceeded in a series of flanking and counterflanking lurches. Chaotic as it was, the rails and their piggy-back telegraph lines pulled together the country commercially. The country had less than 9,000 miles of track in 1850, nearly 50,000 miles by 1870, and 164,000 in 1890. By 1910, the national rail network, with 240,000 miles, was roughly the one we have today.

At least four major industries were enabled by the railroads: factory farms, meatpacking, steel, and petroleum.

Jay Cooke may have been the most respected banker in the country, until the insolvency of his Northern Pacific railroad precipitated the Great Crash of 1873.
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In 1873–1874, more than one hundred railroads failed financially. All of them had borrowed too much, built too far ahead of customers, and couldn't pay their debt service and dividends. The Northern Pacific, however, had a valuable asset—some 39 million acres of federal land grants—and creditors often took land in settlement of their loans. The president of the Northern Pacific, George Cass, had the idea of organizing the absentee owners' lands into productive farms; he hoped the new freights would reinvigorate the line. He tapped as his manager a failed farmer-entrepreneur and Yale graduate, Oliver Dalrymple. Dalrymple's attraction was that he was a visionary who had failed in a promising way—he had run out of capital trying to transform the nature of farming.

Cass provided the capital and the steady hand, while Dalrymple laid out an industrial-style, multiyear production schedule, which included sod busting and plowing 5,000 acres of land each year, with specific land-improvement and planting schedules thereafter. The whole idea would have been infeasible before the advent of quality steel plow blades to cut through the thick tangle of prairie grass roots. Harrowing, seeding, harvesting, threshing followed in quasi-military sequence, and the land was replowed before freezing set in. By the 1890s, gang plowing was being executed with seventy-horse plow teams arrayed in a 45° angle to the plowing line, so the lead team could lead a great wheeling maneuver at the end of each mile-long run.

Dalrymple's first producing parcel, in 1878, had 126 horses, eighty-four plows, eighty-one harrows, sixty-seven wagons, thirty seeders, eight threshing machines, and forty-five binders. By the 1881 harvest, with thirty-six threshers, he was loading three freight-car loads, or 30,000 bushels every day—at an average cost of 52 cents a bushel in a market that was paying $1. That's why they were called “Bonanza” farms. By 1890, American wheat farms west of the Mississippi were producing about 30 percent to 50 percent of the Western world's supply, incidentally jump-starting the
Minneapolis flour milling industry. The Pillsburys were among the first to construct modern, mechanized, flow-through flour milling plants and underwrote many of the railroad extensions into Minnesota.
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Consumers were accustomed to eating salted pork in the form of bacon and hams, but beef consumers preferred their meat fresh. Since the largest markets for fresh beef were in the East, so were the herds. Unfortunately, they were concentrated in the Southeast and were decimated during the Civil War. Entrepreneurs noticed that the seemingly limitless Texas grasslands were full of semiwild longhorns, and European capital flowed into big-ticket ranching. Barbed wire was the critical invention. The XIT ranch, organized in the mid-1870s with 3 million acres and 6,000 miles of barbed wire, was the largest in American history. At first, the cattle had to be driven to train connections in Abilene for delivery eastward to local slaughterers. Within about twenty years, thickening train connections in cattle country consigned the romance of the cattle drive to the pages of dime novels.

Shipping dressed meat was obviously cheaper than shipping steers, but the distances required refrigerated railroad cars. Various experiments with ice-packed cars were unsatisfactory until Gustavus Swift, a Massachusetts butcher, added a forced-air circulatory system. But he was stonewalled by the railroads, which had invested heavily in new fleets of cattle cars and expensive stockyards and watering sites. Swift scraped up enough money to finance ten cars for a Canadian railroad line and started delivering fresh beef to Boston. The transport savings allowed him to undersell the local slaughterers and still book very high profits. He plowed the profits into expansion and started selling fresh “Western Beef” up and down the East Coast. The railroads dropped their opposition, and within just a few years, meatpacking was concentrated in Chicago, where it quickly sorted down into four or five major houses, most of which consolidated vertically into stockyards, ranches, and distribution centers, with American beef transshipping as far as Tokyo and Shanghai.
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Western railroads required steel rails to support their high speeds and heavy freights, but when the postwar railroad boom got underway, American mills still did not mass-produce quality steel, so the roads used British rails. Steelmaking was an ancient craft. The high-carbon iron that emerges from a blast furnace is suitable for casting into stove plate, anvils, and the like but is very hard and brittle. Easy-to-work malleable or wrought iron was created by removing all the carbon, usually by puddling, a tedious craft process. Steelmakers recarburize the iron just enough to hit a sweet spot between hardness and malleability.