Competition at Work: Railroads vs. Monopoly in the U.S. Shipping Industry*

This study primarily establishes two things: (1) that monopoly has been pervasive in the U.S. water transportation industry in both the 19th and 20th centuries and has led to prices above competitive levels and the adoption of inefficient technologies and (2) that the competition of railroads has greatly weakened this monopolistic tendency, leading to lower water transport prices and fewer inefficient technologies. The study establishes these points using standard economic theory and extensive historical U.S. data on the behavior of unions and shipping companies. These gains from competition have been ignored by researchers studying the contribution of railroads to U.S. economic growth. Researchers have assumed that if railroads had not been developed, the long-distance transportation industry would have been competitive. This study shows that it would not have been. The quantitative estimates of previous studies thus are likely to have significantly understated the gains from the development of railroads. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. By their nature, water transportation industries are often subject to monopolization. In some places, for example, geography produces ports through which all water traffic must flow. If groups can take control of those ports, they can charge traffic exorbitant rates. Because of this natural tendency toward monopoly, water shipment prices often are higher than they would be if the water transport industries were competitive. Also, though not generally recognized, the monopolistic tendency often leads to the adoption of inefficient technologies in these industries, as, for example, strong unions of dock workers put restrictions on the use of particular equipment in their work. Within the United States, for much of the nation’s early history, the water transportation industry has had another force pushing toward monopoly: a lack of alternatives. Before around 1840—and long after, in some parts of the country—water was the only affordable form of long-distance transportation. Goods could be moved by wagon, but only at great cost. With no other good alternatives, and a natural tendency toward monopoly in the water transportation industry, long-distance transportation in the United States often exhibited a great deal of monopolistic behavior. Over the last 150 years or so, this behavior has been greatly reduced by the development of long-distance transportation alternatives to water—first trains and then trucks. The competition of railroads, especially, has led to lower long-distance transport prices and fewer inefficient transportation technologies in the United States. Surprisingly, the huge literature that has quantified and debated the gains to the U.S. economy from the development of railroads has ignored this contribution of reducing the tendency toward monopoly in long-distance transportation. Fogel (1964), who pioneered the quantitative assessment of railroads’ contribution to U.S. economic growth, and virtually all the research following his, has assumed that if railroads had not been developed, the existing long-distance transportation industry would have been competitive. It would not have been. The methods of these researchers thus fail to capture the gains from competition, of the lowering of prices and the dropping of inefficient technologies, spurred by the railroads. And the resulting quantitative estimates from these studies thus are likely to significantly understate the gains from the development of railroads. The main purpose of this article is to demonstrate competition at work in the long-distance transportation industry. We primarily establish two things: (1) that there is a strong tendency toward monopoly in the water transport industry which is evident in the United States in both the 19th and 20th centuries and which has resulted in prices above competitive levels and the adoption of inefficient technologies and (2) that the development of railroads has greatly weakened the tendency toward monopoly through time, leading to lower water transport prices and fewer inefficient technologies. After establishing these points, we briefly examine previous calculations—in particular, Fogel’s—of railroads’ contribution to U.S. economic growth at the end of the 19th century. We argue that in view of our work here, and other recent work on the costs of monopoly, Fogel’s estimate of the economic gain from railroads may be far too small. Overview Let us summarize the material we present to support our two main points. That there is, indeed, a strong tendency toward monopoly in the water transport industry is developed in two steps. We first argue that structural characteristics of the water transport industry make it tend toward monopoly. We then list some of the groups in the U.S. industry that seem to have had some monopoly power. In general, three features of the industry make it prone todevelop monopolistic behavior: the ability to create holdup points, the existence of scale economies, and extensive government regulation. Holdup Points. A group is said to have a holdup point along a trade route if that group can, in effect, set up a toll at that point which all traffic must pay. As we argue, U.S. water transportation routes are susceptible to the creation of holdup points. In the 19th century, for example, dock worker unions created such points at places of transshipment, where cargo had to be moved from one form of transportation to another, commonly, from riverboats to oceangoing vessels. In general, even if large portions of a trade route are competitive, a group that can create a holdup point can extract the same profit as if it had a monopoly on the entire route. Scale Economies. For some parts of the water transport industry, the efficient scale of production is large relative to the size of the market. In the United States, this is particularly true for coastal routes, where the relevant market involves shipment of goods between two cities (on a city-pair route). In such markets, the efficient scale of production may involve multiple vessels (to provide a regular schedule, for example), yet the number of weekly sailings between the cities may be fairly small. In this regard, the coastal shipping market is similar to the airline market. Concerns about the exercise of market power emerge in such situations, when the efficient scale of production is large relative to the size of the market. GovernmentRegulation.There may not be an industry that is as extensively regulated and protected as the water transport industry. In the United States, regulations have prohibited foreign competition throughout the industry. These government restrictions have made the industry’s monopoly power greater. Given these structural features, water transport industries are prone to monopolistic behavior. We look here at the U.S. industry in the 19th and 20th centuries. The three main water transport systems in the United States can be seen in Chart 1. One system is that formed by the Mississippi and Ohio rivers (and smaller rivers that are tributaries to them). Another system is that formed by the Great Lakes and the Erie Canal that runs through upstate New York to the Hudson River at Albany. The third is the coastal system, made up of the Atlantic Ocean along the East Coast of the United States, the Gulf of Mexico along the South, and (not shown on the chart) the Pacific Ocean along the West Coast. All three of these systems have had groups with some monopoly power. On the Mississippi-Ohio river system, there were powerful dock worker unions in New Orleans; there was alleged collusion among alliances of warehousemen (known as combinations) in New Orleans; and there were riverboat pilot unions with apparently some power over wages. On the coastal system, along the East Coast and the Gulf of Mexico, there was a warehousemen combination in Buffalo, New York; there were seamen’s unions on the boats of the Great Lakes, powerful dock worker unions in many ports, and shipping combinations on the Great Lakes, though these were not as successful as those on the coasts. However, this system did have the Tugboat Trust, a company that controlled nearly all towing on the Great Lakes. We show that some of these groups used their monopoly power to charge prices significantly above competitive levels in the 19th and early 20th centuries. The hourly wage rates paid to dock workers in New Orleans, on the Great Lakes, and in New York were at various times from two to three times higher than those paid to other freight handlers. Some of these dock workers earned hourly wages that were among the highest in their areas. This suggests that these dock jobs were very valuable to the workers, and this is borne out by the initiation fees charged to enter the dock worker unions. For example, the fee to enter the cotton screwmen’s union (a union of dock workers who stowed, or screwed, cotton into the holds of ships) in New Orleans in 1884 was $50. On the Great Lakes, the most common (modal) initiation fee for longshoremen’s locals in the early 20th century was $50. These initiation fees are extremely high by historical standards. It would have taken approximately from 7 to 10 times longer for a worker (working at the unskilled wages of the time) to earn these dock initiation fees than to earn the mid–20th century modal initiation fee (of $50) for unions in the American Federation of Labor (AFL). The monopoly power of dock worker unions during this period was quantitatively significant in the sense that it raised the overall water transportation price a significant amount. For example, the monopoly profit earned by longshoring unions in New Orleans (that is, their actual earnings less the earnings of similarly skilled workers) in the mid-1880s amounted to roughly 20–30 percent of total transport charges on cotton (longshoring charges plus steamship freight charges) from New Orleans to New York. We also show that some of the groups with monopoly power in the U.S. water transport industry chose to use inefficient technologies. That a monopolist will choose an inefficient technology is certainly an unconventional idea, but it is one with theoretical and factual support, which we discuss below. Moreover, we present evidence that dock worker unions clearly chose to use inefficient technologies. For example, dock worker unions in New Orleans and on the Pacific Coast had work rules that limited the use of equipment. Other union work rules resulted in “a waste of energy and hard work,” according to the head of the Pacific Coast longshoremen’s union, testifying to the U.S. Congress (quoted in Ferguson 1961). After this Pacific Coast union was formed in 1934, new work rules significantly slowed the pace of work. Labor productivity (tons loaded and unloaded per hour) fell dramatically. The development of railroads in the 19th century greatly reduced this tendency toward monopoly in the water transport industry. U.S. water transportation systems were susceptible to the creation of holdup points. But the power at such points was also susceptible to being greatly reduced by railroads. Take the example of shipping cotton grown near the Mississippi River, in Louisiana, to New York. Before railroads, if dock worker unions raised wages in New Orleans, so that the coastal route to New York became more expensive, the only other option for cotton growers was to go up the Mississippi to the Erie Canal. With the development of railroads, many more options became available. Now the cotton could be transported overland to other ports on the Gulf of Mexico—say, Galveston, Texas, or Mobile, Alabama—and then shipped to New York. Without the railroads, this was not economical because of the extremely high cost of wagon transportation. Moreover, with railroads, the cotton didn’t have to go to any port at all. It could simply be taken overland to New York. We present evidence that this ability of railroads to divert traffic to different ports or directly overland greatly reduced monopoly power in ports, leading to lower water transport prices and fewer inefficient technologies in the industry. First, we discuss prices. We describe examples of how competition from railroads helped lower the wages of dock workers and the fees of combinations. The examples come from all the major water transport systems and both the 19th and 20th centuries. • By about 1880, railroads began diverting water traffic from New Orleans in a significant way. Strong pressure was put on dock union wages. From 1885 to 1905, the wages of unionized cotton screwmen in New Orleans fell as much as 20 percent while general wages in that area were increasing. • Late in the 19th century, railroads running from Baltimore (and Philadelphia) to Chicago were diverting traffic from the Erie Canal, and that competition led Buffalo warehousemen to reduce their charges. • Early in the 20th century, railroads diverting traffic clearly broke strikes of dock workers in New Orleans, in Boston, and on the Pacific Coast, thus preventing these workers from increasing their wages. • And in the early 1960s, in recognition of the railroad competition that U.S. coastal shipping faced, longshoremen on the U.S. East Coast agreed to charge coastal water traffic up to one-quarter of what the longshoremen charged foreign traffic. Second, we show that railroad competition led to the dropping of inefficient technologies in the water transport industry. Some dock worker unions in New Orleans changed their work rules over the period 1885–1905 so as to increase the pace of work 20 percent. Some unions also dropped work rules which required unskilled work to be done by skilled workers. Tendencies Toward Monopoly In this section, we argue that there are generally strong tendencies toward monopoly in water transportation systems. The first part of this section focuses on structural features of the industry that make it ripe for monopoly. The second part itemizes various groups in the industry in the United States in the 19th and 20th centuries that the evidence suggests had some monopoly power. Susceptibility Here we discuss three features of the water transport industry that generally make it tend toward monopolistic behavior: the ability to create holdup points, the existence of scale economies, and extensive government regulation. Holdup Points A holdup point is a simple concept. Suppose goods are shipped between points A and B such as in Chart 2. In the chart, there are several routes from A to B. But there are some points, such as point H, through which all cargo must pass. We say that there is a holdup point at H if a group is able to capture this point and charge everyone who passes through it a fee, or toll. Everyone trying to travel from A to B, that is, has no choice but to pay the group in order to do so. Let us call the set of all routes between two points A and B that go through point H the H-system of routes. In Chart 2, of course, all routes belong to the H-system. However, one can imagine drawing an arc that goes from A to B but lies everywhere below the routes on the chart and has no point in common with them other than A and B. This route would not be part of the H-system of routes. Suppose there is a holdup point at H, but the rest of the H-system is competitive; that is, there are no other holdup points, and prices charged to use vessels are set at marginal cost. Using arguments from the industrial organization literature, we can see, straightforwardly, that the profitmaximizing toll revenue at H is the same as what the monopoly profit would be if the entire H-system were monopolized. This follows the standard argument that when there is a monopoly over one input and the technology is Leontief with respect to other inputs, the monopolist has no incentive to vertically integrate into the other inputs (Carlton and Perloff 1990). The technology of getting from A to B here is a fixed-coefficient one, since for every unit transported from A to B, one unit needs to go through H. Two characteristics of U.S. water transportation systems in the period we are studying made them susceptible to groups creating holdup points along them. First, for nearly all commodities, either there was only one relevant system on which to ship goods, as in Chart 2, or there were just two systems. In other words, for many products, there was little competition between systems. Second, along these systems, there were natural holdup points at points of transshipment, again, places where cargo is moved from one mode of transport to another, for example, from a riverboat to an oceangoing ship. The location of transshipment points is determined by geography—where a river hits an ocean, such as at New Orleans, or where a canal hits a lake, such as at Buffalo. Consider the example of shipping cotton grown near the Mississippi River, in Louisiana, to New York. In most circumstances, before railroads arrived, the relevant route involved shipping the cotton a relatively short distance down the Mississippi River and then on through the Gulf of Mexico and up the East Coast to New York. Along this route, there was a natural holdup point in New Orleans, where the cotton had to be transferred from a riverboat to an oceangoing vessel. If workers could successfully unionize the docks at New Orleans, they could create a holdup point. If a single firm or a small group could buy up the docks at the port, it could create a holdup point. Besides that, as an intermediate stage of the transshipment process, goods were often transferred to warehouses. If a group could monopolize the warehouses in New Orleans, that group, too, could create a holdup point. If groups began to turn New Orleans into a holdup point and started raising prices, then cotton growers, of course, had the option of using other water transportation systems that did not include New Orleans. But these options were limited: There was only one other water system from the middle of the country to the East Coast, the system that included the Erie Canal. For a cotton grower in Louisiana, therefore, costs in New Orleans would have had to get very high before the system through the Erie Canal would look attractive. For other goods, like grain grown in Ohio, the two systems were better substitutes. But even here there were only two water transport systems, the one including New Orleans and the one with the Erie Canal. If one group were to set up a holdup point in New Orleans and another group were to set up a holdup point in Buffalo, there would be a duopoly situation (in which two transshipment points competed). If grain was to move north by the water system that included the Great Lakes and the Erie Canal, then Buffalo was a natural holdup point. How about the possibilities of holdups in originating ports on the Great Lakes, like Chicago? The transshipment point at Chicago was not unavoidable like that at, say, New Orleans. If groups in Chicago attempted to charge too much, there were other options: Milwaukee, Toledo, and Cleveland. But delivering grain to another port instead of Chicago may not have been a great option. Again, without railroads, diverting traffic from one port to another could be extremely expensive. Moreover, if groups could organize throughout the Great Lakes ports, there would be no escaping them. Some groups did organize throughout these ports. For example, one group, the Tugboat Trust, controlled most of the towing services throughout the Great Lakes. Also, the longshoremen’s union organized most of the docks on the lakes. According to Hoagland (1917, p. 104), “by 1899 almost every man working on the Lake Erie docks was a member of that organization” (the International Longshoremen’s Association). Since some of these groups were organized throughout the Great Lakes ports and diverting traffic without railroads could be expensive, the possibility of holdup points in Chicago and other originating ports was significant. Scale Economies Another feature of the water transport industry also gives it potential to be monopolistic: the efficient scale of production in this industry is sometimes large relative to the size of the market. When this sort of situation exists, shipping companies can charge rates above competitive levels. We argue that this situation did exist in some parts of the U.S. water transport industry in the 19th and 20th centuries. This situation particularly applied on the coastal routes. Here the relevant market was the shipment of a wide range of goods between two cities (again, a city-pair route). As we shall see, many city-pair routes were relatively small markets. Some of those markets had only a few sailings per week. There are also reasons to think that the efficient scale of production in coastal shipping was large. It is reasonable to think that this activity might require multiple vessels. Consumers of transportation services value a regular schedule of departures and a variety of departure times. Having a large scale of operation makes these features possible. In coastal routes, then, the efficient scale of production was probably large relative to the market. Most individual markets (city-pair routes) would be served by a single steamship line. We demonstrate this point in Table 1, which lists the steamship lines operating in 1881 between Baltimore and other ports along the East Coast. The table shows that each market (that is, Baltimore and the other city of the pair) was served by only one line, except New York, which was served by two. Moreover, most of these lines had multiple steamships in service; for example, seven operated between Baltimore and Norfolk. Note also that the number of trips between city-pairs each month varies widely, from 5 to 60. But about half of the city-pairs had 10 or fewer monthly trips. This means that ships sailed between those city-pairs less often than three times a week. This pattern is consistent with the view that the scale of entry in this industry is large relative to the market. The historical coastal shipping market likely shares many similarities with today’s airline industry. In the airline industry, many city-pairs are served by a single carrier, and some think that this market power is exploited by the airlines. Regulation Still another feature of the water transport industry that makes it strongly conducive to a monopolistic tendency is the high degree of government regulation it generally has had. In most countries throughout the world, the water transport industry is extensively regulated and protected by the government. This feature of the industry is, of course, unlike the other two: it is not a primitive feature of the technology as are holdup points and scale economies. But government regulation is such a striking feature and plays such a significant role in the industry that it needs to be acknowledged. The U.S. regulations we now describe have been in force in varying degrees since the nation was founded; they have thus been a more or less permanent fixture of the industry’s environment, albeit one that was chosen in the political forum and not by nature. We discuss just three types of laws that have protected this industry in the United States. First, laws have prohibited any foreign ships from shipping between any two U.S. ports; foreign competition on domestic routes has been outlawed. Second, U.S. shipping companies have been required to purchase ships from U.S. shipbuilders; foreign competition in shipbuilding has been outlawed. And third, U.S. shipping companies have had to hire U.S. citizens to fill a portion of their crews; foreign competition for many jobs has been outlawed. Given the technological considerations that made the water transport industry ripe for monopoly, government restrictions on foreign competition contributed significantly to the monopolistic character of this industry. As mentioned, scale economies were particularly likely to be substantial in coastal trade. By outlawing foreign ships on this system, the monopoly problem was exacerbated. That foreign firms could not sell ships in the United States tended to increase the power of any groups in the domestic shipbuilding industry with monopolistic tendencies. We have not explored the structure of the domestic shipbuilding industry in detail, but it had unions in the 19th century (Heinrich 1997). That U.S. shipping firms could not hire totally foreign crews tended to increase the power of any seamen’s unions in the domestic shipping industry. Groups We have seen that there are structural features of the water transport industry that push it toward monopoly. Now we describe two types of groups in the U.S. industry that seem to have had some monopoly power: unions and combinations. We also briefly discuss the U.S. history of these groups. Unions Some unions of laborers in the water transport industry seem to have had significant power to influence their wages and working conditions in the United States in both the 19th and 20th centuries. Dock Workers. Strikes of dock workers in New York date from at least 1836 (Barnes 1915, p. 93). Dock worker unions in New Orleans date from at least 1850 (Arnesen 1991, p. 21). These unions wielded significant power throughout most of the period from the U.S. Civil War to the early 20th century, as the evidence below indicates. After the 1881 dock worker strike, the mayor of New Orleans observed that the strike’s success demonstrated the “weakness of the power of the state when a few labor organizations could do as they pleased, and set at defiance law and order, and stop the business of such a large city as New Orleans” (quoted in Arnesen 1991, p. 72). The unions involved in the movement of cotton were particularly strong. A Chicago newspaper observed that “no such a monopoly ever existed before” (quoted in Arnesen 1987, p. 142). Dock worker unions on the Great Lakes date from at least 1870 (Commons 1905, p. 60). Late in the 19th century, these unions appear to have had substantial power, as the evidence below indicates. Riverboat Pilots.The United States had unions of riverboat pilots as early as 1841 (Hunter 1949, p. 468). There is as yet no hard evidence about the extent to which such unions were able to raise wages above competitive levels. However, some claimed during the 1850s that the riverboat pilots, who were empowered to certify new pilots under the Steamboat Inspection Act of 1852, were refusing to certify new pilots, thereby significantly increasing the wages of existing pilots (Hunter 1949, p. 471–72). Seamen. Unions on the vessels of the Great Lakes (as opposed to on the docks there) date from at least 1854 (Hoagland 1917, p. 32). On the Great Lakes, the unions of workers on boats during the latter part of the 19th century do not seem to have been as successful as those on the docks. Seamen unions were vigorously resisted by employer groups. Late in the 19th century, there was much violence between employers and union supporters. Some of these unions achieved closed shop status. Combinations Another type of group in the U.S. water transport industry also seems to have had significant power to influence prices in this industry: combinations. These are alliances of individuals or companies which teamed up in order to better achieve their common ends. We discuss first warehousemen combinations, then shipping line combinations. Warehousemen. Some observers at the time thought that warehousemen in Chicago, Buffalo, and New Orleans had some market power in the 19th century. (See, for example, Veblen’s 1892 discussion, some of which we review later.) By the 1890s, the power of warehousemen in New Orleans was a subject of great concern among merchants in that city. Their business had declined as cotton shipments were diverted in large numbers away from the port of New Orleans. In discussing the reasons for the decline, Hester (1896, p. 4) describes the effects of both the power of labor unions in the city to set their own wages and work rules (which we alluded to above) and the agreements among warehousemen there to follow similar pricing policies: By far the most serious impediments have been the labor problem and [cotton] press and warehouse combination. These were actually strangling the local cotton trade. For a long time it was simply a question of “stand and deliver.” Certain fixed charges and rules were determined on, and each and every bale consigned to a New Orleans merchant must abide by them. Expediency was not considered; the cotton must stand the tax, or, if not, go elsewhere for a market or be shipped “through.” The labor question reached a point in 1895 culminating in serious disturbances on the levee front, the troubles curtailing the gross movement of cotton that season about 500,000 bales. The result has been, however, to clear the atmosphere in that respect, and conditions are now more favorable than they have been for many years. The press and warehouse combination has continued in existence up to the present time. While its operations have been injurious to New Orleans, and while its charges have been potent factors in restricting the local trade, it would not be just to set upon its members the seal of condemnation. The real fault lay in existing conditions, of which they avail themselves to secure the best possible returns for the capital invested. They did what any and all merchants in any city or section would have done. Hester seems to know about holdup points. Shipping Lines. Off the dock, combinations and collusive practices in ocean shipping were common throughout the world in both the 19th and 20th centuries (McGee 1961). This was true of U.S. ocean shipping as well. The Gulf of Mexico had a lot of collusive activity among steamship lines. Baughman reports it there both before and after the U.S. Civil War (1968a, p. 137; 1968b). According to Baughman (1968b, pp. 374–75), “in 1878 the Morgan and Mallory lines signed the first of a series of secret agreements equilibrating New York and New Orleans sea rates to Texas. Henceforth, they abandoned rate cutting as a competitive tactic at sea—except against third parties.” Early in the 20th century, the U.S. Congress appointed a commission to investigate combinations and collusive practices in the entire U.S. domestic and foreign trade. This group was known as the Alexander Commission. After studying the U.S. domestic coastal trade, this commission (U.S. Congress 1914, p. 421) concluded that “competition in rates between domestic water lines . . . has been . . . effectively eliminated.” The Alexander Commission’s report cites several factors to support that conclusion. Concentration of ownership of shipping lines was very high. Not only that, but the few existing lines stayed out of each other’s way. According to the commission, there was only one regular water carrier between New York and the ports of Portland (Maine), Boston, Philadelphia, Baltimore, Norfolk, Wilmington, Charleston, Savannah, Jacksonville, and New Orleans. The commission (p. 370) reported that “Galveston is the only important Gulf port which has two services from New York—the Mallory and Morgan lines—but these . . . work in absolute harmony.” The few big lines that operated in the U.S. coastal trade also had methods of working together to crush new entrants, the Alexander Commission reported. One method was the use of “fighting ships” (U.S. Congress 1914, p. 393). If a new steamship line attempted to enter a route, the established lines, or combinations, would add steamships to that route, called fighting ships, which had only one purpose: to drive the new entrant from the market. Sometimes the established combinations would move even before entry had occurred. For example, the commission reports (p. 393) that “Mr. F. S. Groves stated that at about the time of the organization of his line [the Philadelphia & Gulf Line] the Southern Steamship Co., operating between Philadelphia and Tampa, promptly advertised the extension of its service to New Orleans, and through this act was instrumental in stopping subscriptions to the stock of the Philadelphia & Gulf Line.” The Alexander Commission also studied collusive practices on the Great Lakes. In most Great Lakes shipping markets, the extent of these practices seems to have been less than on the coastal routes. In one market, however, it may have been greater. According to the commission (U.S. Congress 1914, p. 340), “the Great Lakes Towing Company controls exclusively the towing of all the Lake Erie ports of any importance and also that of Chicago, South Chicago, Gary, Duluth and the Soo.” Formed in 1899, the Great Lakes Towing Company, commonly called the Tugboat Trust, was found to be in violation of the Sherman Antitrust Act in 1910. Effects of Monopoly In this section, we first present evidence that some of the groups listed above were able to use their monopoly power to raise prices above competitive levels in both the 19th and 20th centuries. We then show that the use of that power translated into huge markups on costs at transshipment points, which added significantly to the total costs of transportation. Finally, we present evidence that monopoly power in the water transport industry also led to the adoption of inefficient technology. High Prices Here we show that a major component of shipping costs, the price of labor, was affected by the monopoly power of unions. We show that hourly wages earned by dock workers in New Orleans, in New York, and on the Great Lakes were significantly higher than competitive wages would have been. We do this by comparing the wages of dock workers to those of workers in the same area, at the same time, who did jobs of comparable skill. Dock Wages in New Orleans . . . We first compare the wages of union dock workers in New Orleans in 1904–5 to those of other unionized workers in New Orleans, including those in the railroad industry. We then compare union dock worker wages to wages of workers in manufacturing establishments in New Orleans. The conclusion is that in 1904–5, the dock workers earned substantial premiums over the earnings of most of these workers and had some of the highest hourly wage rates of all such workers in New Orleans. The Report of the Bureau of Statistics of Labor for Louisiana—1904–05 (Lee 1906) lists the agreements reached between various employer groups and unions in New Orleans in 1904–5. We display the hourly wage rates in some of those agreements in Chart 3. Clearly, the freight handlers on the docks received substantially more than railroad freight handlers. The cotton screwmen (who received 56¢ per hour) were skilled workers. But the other types of dock freight handlers arguably were not skilled. Yet longshoremen received from two to three times their railroad counterparts (between 40¢ and 50¢ vs. between 16¢ and 20¢). The teamsters (or drivers) on the docks also received high wages relative to other unionized teamsters. The draymen—who hauled goods by cart, or dray—received 30¢ an hour; the coal wheelers, 40¢ an hour. These wages are from one and a half to two times larger than those of the unionized teamsters in the carriage industry (20¢) and the beer industry (21¢). While railroad worker unions were particularly weak compared to dock worker unions, the chart suggests they were not weak compared to other unions. Machinists in the railroad unions received about what machinists received in a union agreement with the machine shops (34¢ vs. 33¢ for inside work and vs. 39¢ for outside). With wages between 40¢ and 50¢ an hour, the longshoremen earned more than some of the unionized workers in skilled trades: union agreements signed in 1904–5 put the wages of engineers at 33¢ and, again, those of machinists between 33¢ and 39¢. We next compare the wages of dock workers in New Orleans to those in manufacturing establishments in New Orleans (reported in Lee 1906). Averages for some types of these workers are also displayed in Chart 3. We do not know how many of these manufacturing workers were unionized. These data seem to tell the same story as those from union agreements. Teamsters on the docks did very well compared to teamsters who drove for manufacturing establishments. While teamsters on New Orleans docks earned 30¢–40¢ an hour, hourly wages for teamsters in manufacturing averaged 19¢. The hourly pay for general help and laborers in manufacturing (not shown on the chart) averaged 15¢ an hour. At 40¢–50¢ an hour, the wages of longshoremen, who may arguably be classified as unskilled, were significantly above the wages of unskilled workers in other industries. The longshoremen (and, hence, the screwmen) on the docks also earned more than many of the skilled workers in manufacturing establishments. For example, longshoremen earned more than machinists and engineers in manufacturing, who both earned 29¢ an hour on average. In summary, the hourly wage rates paid to New Orleans dock workers in 1904–5 were substantially higher than those paid to freight handlers, teamsters, and unskilled labor in other industries, the jobs that were closest to most of the dock worker jobs. They were also higher than skilled wage jobs like machinists and engineers. . . . And Elsewhere The New Orleans wage differences existed elsewhere in the U.S. water transport industry too. Dock worker wages were also substantially higher than the wages of other freight handlers and unskilled workers in New York and on the Great Lakes. In Chart 4, we display some of the wages in these areas. Barnes (1915) reports that in 1874, longshoremen in New York were paid 40¢ an hour, and those in rail yards 17.5¢ an hour. Barnes (1915, p. 96) mentions this in the context that the longshoremen wages were about to be attacked by employers. The longshoremen, he says, “received 40 cents for day work, 80 cents for night work, and $1.00 for Sundays. When work was steady there was the possibility of large earnings. Why, it was asked [by New York merchants], should the price for handling cargo freight be so high when railroad freight was handled at the rate of 17 1/2 cents an hour.” Kleven (1941, p. 454) states that unionized dock workers on the Great Lakes who loaded lumber onto boats (whom he calls “shovers”) earned 50¢ an hour through the 1890s and into the 20th century. He also discusses the wage of “common laborers” in the lumber industry and argues that it ranged from 12¢ to 14¢ an hour. The shovers obviously earned a substantial premium over unskilled labor. Discussing the early 20th century, Commons (1905), too, says that “lumber loaders” (shovers) earned 50¢ an hour on the docks; he puts the wages of longshoremen handling lumber at 60¢ an hour and dock iron shoveler wages at 55¢–60¢ an hour. Commons says railroad freight handlers earned only 17¢–20¢ an hour. Union Initiation Fees Dock work was often sporadic and sometimes subject to danger, which might seem to make it less attractive to workers in general. But these jobs were highly valuable to workers, which is clear from the large initiation fees they had to pay to enter the unions. The initiation fees in some of the late 19th century dock worker unions were large measured either by the time required to earn those fees or by historical standards. In Table 2, we present the time required to earn the union initiation fees by workers in various occupations. For historical comparison, we also present the time required to earn the fees to enter general labor unions after World War II. The fee to enter the New Orleans cotton screwmen’s union in 1884 was $50. Railroad freight handlers at the time would have had to work about 333 hours to make that much; unskilled workers would have needed 500 hours. Commons (1905) reports a range of fees for longshoremen’s locals on the Great Lakes in the early 20th century, but he also puts the modal fee at $50. In this later period, railroad freight handlers would have had to work about 250–90 hours to make enough to join that union, and unskilled workers would have needed 333 hours. These are substantial fees for a worker to pay to join a union. These fees are also high by historical standards. Taft (1946) reports a range of fees for AFL unions after World War II and puts the modal fee at $50. At that time, it would have taken a worker approximately 46 and 49 hours working at railroad wages and unskilled wages, respectively, to earn this fee. Hence, it would have taken approximately from 7 to 10 times longer for a worker (working at the unskilled wages of the time) to earn these dock initiation fees than to earn the mid–20th century modal fee for AFL unions. High Transport Costs The evidence above indicates that some groups at transshipment points had significant monopoly power. But did this translate into significantly higher costs for the entire water transportation system? Here we argue that it did. Transshipment Costs We begin by showing that transshipment costs were a big share of total water transportation charges. In Table 3, we present some late 19th century water transportation charges, including port charges (for moving cargo between ports and vessels) and freight charges (for moving cargo across water) for two routes: the northern route from Chicago to New York (from the Great Lakes to Buffalo to the Erie Canal) and the southern route from New Orleans to New York (a coastal route). The port charges on the northern route amounted to roughly half the freight charges, 10.5¢ per bushel vs. 20¢ per bushel (Lee 1938, p. 173). On the southern route, the port charges were even larger (Hester 1896, p. 4); they were greater than or equal to the freight charges. In Table 4, we present our own estimates of transshipment costs on cotton moving from New Orleans to New York in 1885. In contrast to Hester (1896), we want to consider cotton that comes into New Orleans on a riverboat. (Hester considered only cotton coming in on trains.) Also, we will make the calculations for a period 10 years earlier than Hester did, for a time when union wages were higher (and had not yet come under pressure from the railroads). To do our own calculations, first let’s see what type of costs a bale of cotton would incur as it was moved from New Orleans to New York. The charges in the port of New Orleans began at the wharf, where riverboats that had traveled down the Mississippi River were unloaded. The screwmen were paid to unload the boats and the longshoremen were paid to take the cotton from the screwmen and place it on the wharf. Next the cotton was transported from the wharf where the riverboats had landed, perhaps initially to warehouses. These services were provided by the teamsters on the docks, the draymen. Cotton stored in warehouses was handled by the cotton yardmen. Other dock workers may have had roles. Lastly, the draymen transferred the cotton to the wharfs where the ocean steamships were located. Then the cotton needed to be loaded onto those steamships. The longshoremen handed the cotton up to the screwmen, who screwed it into the ships. The fueling of the ships was provided by the coal wheelers. The cotton was then steamed to New York. Though we know that all of these groups had strong unions—that is, the screwmen, the longshoremen, the draymen, the cotton yardmen, the coal wheelers, and others—and we know the hourly wages for many of these groups, at this point we can only approximate the per bale charges for the screwmen and the longshoremen. These approximate charges in 1885 are displayed in Table 4. For loading vessels, the screwmen had a union limit of 75 bales per day per gang. Gangs (of five members) were paid $31 a day. At 75 bales, the cost to the shipper of the screwmen’s work is, then, 41¢ a bale. Now, in loading vessels, the longshoremen handed cotton up to the screwmen. We do not know how many longshoremen served the screwmen, though we do know that the longshoremen were often idle and had as a work rule that they were paid during these idle periods. If one longshoreman served one screwman, then the longshoremen’s charge would have been 33¢ per bale (5 men × 50¢ per hour × 10 hours = $25 per day, or 33¢ per bale). For unloading vessels, we do not know the rate at which the screwmen handed bales down to the longshoremen. But suppose, first, that it was the same as the loading rate, 75 bales per gang per day. Then the screwmen’s unloading charge would have been the same as their loading charge, 41¢ per bale. If one longshoreman served one screwman to unload as well as load, then the longshoremen’s charge also would have been the same as their loading charge, 33¢ per bale. These four charges are in the first column of figures in Table 4. But we might be wrong about the one-to-one ratio of longshoremen and screwmen and about the rate at which screwmen unloaded vessels. Suppose, instead, that one longshoreman served two screwmen and that the screwmen unloaded vessels at the rate of 100 bales a day. Then the screwmen’s charge for loading would still have been 41¢ per bale, but the longshoremen’s charge for loading 75 bales would have been 16.7¢ per bale (2.5 men × 50¢ per hour × 10 hours = $12.50 per day, or 16.7¢ per bale). The screwmen’s charge for unloading would have been 31¢ per bale ($31 for 100 bales), and the longshoremen’s charge for unloading would have been 12.5¢ ($12.50 for 100 bales). These four charges are in the second column of figures in Table 4. Recall Table 3, which includes Hester’s (1896) report that screwing cotton into a ship cost 50¢ per bale in 1895. The charges in Table 4 for loading cotton into ships in 1885 range between 57.7¢ and 74¢ per bale (the sum of the screwmen and longshoremen fees). The mid-1880s was an exceptionally strong period for the unions, and union wages fell between 1885 and 1895. So we feel confident that our estimates of the charges are approximately correct and that the actual charges may have been in the middle of our range of estimates. Markups Let us now turn to estimating the markups, or monopoly profits, in these charges. We estimate the monopoly profit earned by the unions in unloading and loading activities and then estimate how large that monopoly profit was relative to total transport charges (unloading and loading plus ocean freight) to New York. The total unloading and loading charges in New Orleans, if we use the assumptions in the first column of Table 4, were $1.48. To calculate the per bale monopoly profit earned by the unions, let’s first calculate their monopoly profit per hour worked, that is, actual earnings less earnings of similarly skilled workers. In the mid-1880s (Table 6), the screwmen earned 67¢ an hour. If we suppose that their skill level is comparable to that of, say, machinists and engineers, who earned union wages of about 33¢ an hour, then about half of the screwmen’s wage is monopoly profit. The longshoremen earned 50¢ an hour at this time. If we suppose that their skill level is comparable to that of freight handlers on the railroad, who earned 15¢ an hour, then the longshoremen’s monopoly profit is about 35¢ an hour, or about two-thirds of their wage. Let’s now calculate the monopoly profit per bale. Total monopoly profit equals half of the screwmen’s per bale charges and two-thirds of the longshoremen’s, or 41¢ + 44¢ = 85¢. With the lowest steamship freight charge to New York, total unloading and loading plus freight charges was $2.73. Monopoly profit thus amounts to 31 percent of total transport charges ($0.85 ÷ $2.73). If, instead, we use the highest steamship freight charge, monopoly profit is 24 percent of total charges ($0.85 ÷ $3.48). The total unloading and loading charge in New Orleans if we use the assumptions in the second column of Table 4 was $1.01. Total monopoly profit equals half the screwmen’s charges and two-thirds of the longshoremen’s, or 36¢ + 19¢ = 55¢. With the lowest steamship freight charge, then, monopoly profit amounts to 24 percent of total transport charges ($0.55 ÷ $2.26). If, instead, we use the highest steamship charge to New York, monopoly profit is 18 percent of total charges ($0.55 ÷ $3.01). Thus, as Table 4 displays, the monopoly profit earned by New Orleans dock worker unions in unloading and loading activities may have been between 18 and 31 percent of total transport costs. Inefficient Technology Higher than competitive prices and profits are the conventional types of evidence that a monopoly exists in an industry. But monopolies can have other negative effects as well. Here we present evidence that groups with monopoly power in the U.S. water transport industry chose to adopt inefficient technologies. Since the idea that a monopolist would choose an inefficient technology is not commonly known, we start by presenting some recent theory that indicates a link between monopoly and the choice of inefficient technology. We follow that with some evidence specific to the U.S. water transport industry. General Theory An old literature argues that a monopolist will be inefficient (Leibenstein 1966). This old literature does not develop a theory about why this is true, but rather just asserts a link between market power and inefficiency and gives it a name (X-inefficiency). More recently, progress has been made in understanding this link. Standard economic theory says that to maximize profits, firms—even monopolists—try to minimize costs. Why would a monopolist choose to be any less productively efficient than a competitive firm? Recent literature assumes that there is some sort of friction in the extraction of monopoly rents, some limit in the space of contracting possibilities. In these models of inefficiency, if the monopolist were to choose a more productively efficient means of production (and thereby increase the total pie), it would somehow lose (and decrease its particular slice of the pie). Recent work that has this feature includes that of Holmes and Schmitz (1995, 2001) and Parente and Prescott (1999). In the work of Holmes and Schmitz (1995, 2001), for example, groups with skills in an old technology block new technology that will destroy their rents. Kocherlakota (2001) motivates some of these contracting frictions based on model primitives. Water-Specific Evidence We now present evidence that two U.S. groups with monopoly power, the unions of longshoremen in New Orleans and on the Pacific Coast, chose to operate inefficient technologies in the 19th and 20th centuries. NewOrleans. Some work rules of dock worker unions in New Orleans are displayed in Table 5. Some of these rules clearly lowered the productivity of work on the dock. Consider, for example, the third work rule listed for the cotton screwmen in the 19th century. Recall that the screwmen were skilled workers whose skill consisted of packing cotton into ships. But the third rule states that the cotton screwmen were also to unload the riverboats that had come down the Mississippi, an unskilled task. Skilled labor employed at an unskilled task is clearly an inefficient arrangement. (These skilled workers were paid at screwmen’s wages to do this unskilled work.) Consider also two work rules in the 20th century which reduced efficiency. The fourth work rules listed for the screwmen and the second rule listed for the longshoremen limited the use of particular equipment in their work, clearly another inefficient arrangement. But the greatest loss in productivity resulted from the screwmen’s blocking of new technology that was meant to eliminate their job entirely. Technology was developed in the early 1900s that allowed cotton to be dropped down a chute or slide into the holds of ships. Often referred to as “shoot the chute,” this technology had the promise of greatly increasing the productivity of dock workers. It was estimated that with this method, a crew of four or five men could load 400–700 bales of cotton per day instead of the 75–90 bales that a gang of five plus a foreman could load by hand. But the screwmen were able to significantly slow the adoption of this technology for decades. (For details on these and related issues, see Arnesen 1991, pp. 163, 165– 69, 212–14.) The Pacific Coast. The monopoly power held by Pacific Coast longshoremen unions also reduced efficiency over the middle part of the 20th century. While the longshoremen unions on the West Coast dated to the 19th century, they gained a significant increase in monopoly power in the mid-1930s, when they organized a coastal union, the International Longshore and Warehouse Union (ILWU). This union represented workers in most ports along the coast, and it gained significant control of the work process. Employers complained that after the formation of the ILWU, the pace of work slowed significantly and union work rules were adopted that imposed additional costs on the employer when mechanization was attempted. One significant change to slow work was to dramatically reduce the maximum weight of each bundle of cargo lifted (the sling load ). According to Mills and Wellman (1987, p. 177), before the formation of the coastal union in 1934, “the ‘general, breakbulk cargo’ sling-load . . . had been 4000–4400 pounds” in San Francisco. After the formation of the union, a limit of 2,100 pounds was placed on these sling loads (Mills and Wellman 1987, p. 183). While such a limit on sling loads dramatically reduced the amount of work done per hour, it also obviously had a potential benefit of reducing accidents on the job. But there were even clearer cases of waste and inefficiency tied to the unions. These were readily acknowledged by the unions as work practices they insisted on which led to inefficiencies. One example of an inefficient work practice is the requirement by the longshoremen that cargo moved by platforms (pallets) be placed on the “skin of the dock” (Ferguson et al. 1961, p. 515, n. 6). The inefficiency of this was acknowledged by the head of the ILWU, Harry Bridges, in Congressional testimony, in response to a question about such practices. He said, “That is one of the practices we have to get rid of. That is one of the practices that is prevalent in San Pedro [California] we have to get rid of because it is a waste of energy and hard work. It does not make mechanization pay off” (quoted in Ferguson et al. 1961, pp. 515–16). Another example is from a history of the ILWU (written by the ILWU). This publication discusses the great pressure unions felt to reform dock work practices when employers began to take advantage of technological innovations in the late 1950s. With regard to this, the union history states that “the union concluded that new methods and machines would be introduced no matter how great members’ resistance to change . . . . The union and the employers . . . agreed the following principles would shape the 1960 contract: the shipowners and stevedoring contractors were freed from restrictions on the introduction of labor-saving devices, relieved of the use of unnecessary workers, and assured of the elimination of work practices which impeded the efficient flow of cargo” (Vrana 1997). Clearly, the union acknowledged that there were unnecessary workers on the docks. In the middle part of the 20th century, then, employers and unions agreed that union work practices reduced productivity. While there isn’t a major study of productivity, we can take a broad look at some numbers. In Chart 5, we present the labor productivity of the Pacific Coast longshoremen during the first half of the 20th century (with productivity measured by the number of tons loaded and unloaded per worker hour). The years 1926 and 1933 are before the coastal union was formed in 1934. Note that workers’ productivity fell dramatically after that. The data plotted in the chart do not control for the types of good handled, the amount of traffic handled by the various ports, and so on. They are admittedly only suggestive. But what they show is not surprising, given the limit on sling loads and other work practices imposed by the union. Effects of Competition Now we show that in the United States the competition of railroads lessened the monopoly power of groups in the water transport industry and that this competition led to the lowering of prices and the dropping of inefficient technologies in this industry. We focus on the railroads’ influence on the monopoly power of groups at holdup points since we have the most evidence for these groups. As we mentioned, U.S. water transportation systems were susceptible to the creation of holdup points. But, again, the monopoly power at such points was also susceptible to being weakened by railroads, which provided an economical option to water transportation that had not existed before. Once this option existed, if shippers wanted to avoid holdup points, they could, by moving goods partly or totally by railroads. This competition had dramatic effects on the water transport industry. Lower Prices First we discuss how the development of railroads reduced the power of dock worker unions, which inevitably led to a reduction in water transport costs. Railroad Competition Lowered Union Wages . . . The competition of railroads took business away from waterways and thus reduced monopoly wages in the U.S. water transport industry. A prime example comes from the port of New Orleans. By the late 1880s, railroads were putting significant pressure on the docks in New Orleans. Some cotton was going overland to New York, bypassing water altogether. And some cotton was being shipped by train to New Orleans, thereby eliminating the unloading work of dock workers. To see an example of how quickly railroads eliminated the unloading and other dock work, examine Chart 6. It shows the amount of cotton arriving in New Orleans from the Red River Valley area by water and by rail between 1878 and 1887. Whereas no cotton arrived by rail before 1881, by 1887 much more came by rail than by water (and the amount of cotton coming by water had even decreased in absolute terms). The path of dock worker wages relative to other New Orleans wages reflects this pressure from railroads. That path between the mid-1880s and the mid-1900s is summarized in Table 6. While screwmen’s wages fell more than 16 percent and longshoremen’s wages fell 20 percent over this period, the wages of freight handlers for the Illinois Central Railroad increased nearly 7 percent. A large share of these drops in New Orleans dock worker wages probably was due to the railroad competition. The drops were certainly not due to a general decline in wages in the nation or the region. At the time dock worker wages were falling, the wages of workers in other industries were rising. We do not have good wage data to compare the wages through time of particular types of workers in New Orleans, like teamsters, machinists, and engineers. But aggregate data series are suggestive. Between 1890 and 1905, for example, when dock worker wages were falling, the average hourly wages in U.S. manufacturing industries rose 20 percent, and average annual earnings in all U.S. industries rose 14 percent. At the same time, average aggregate wages in the U.S. South were keeping up with those in the nation (Rosenbloom 1990, p. 94, Table 2). Hence, at neither the national level nor the regional level were wages feeling the significant downward pressure that is apparent in the wages of New Orleans dock workers. . . . Lowered Warehouse Fees . . . Late in the 19th century, railroad competition also affected other dock charges. In his analysis of wheat prices in the 19th century, Veblen (1892, pp. 89–90) discusses the market power of warehousemen in the Buffalo water transport industry and how railroad competition, particularly railroads running from Philadelphia and Baltimore to Chicago, reduced that power. Railroad competition with the Erie canal system threatened to divert the grain trade from that route to other ports, as Philadelphia and Baltimore, and this led to close scrutiny of local charges at Buffalo and New York, with a view to removing any abuses that burdened the traffic. Criticism and recrimination ensued between the trade corporations of the two cities, in which some interesting developments, due to the virtual monopoly long possessed by the Erie Canal route, came to light. It was found that the charges, at Buffalo perhaps more elaborately than elsewhere, had been ingeniously arranged to take as high toll as might be on every bushel . . . . Under the stress of necessity the middle-men, who drew their income from the traffic, gradually and reluctantly lowered their charges during the seventies to a point at which their amount would no longer work to the manifest detriment of