Determinants of Homestead Claims and the Expansion of Western Settlement
Randy McFerrin
New Mexico State University
[email protected]
Stephen Norman
University of Washington, Tacoma
[email protected]
Douglas Wills*
University of Washington, Tacoma
[email protected]
January 2012
Abstract
This paper examines the impact economic variables had on the rate of settlement, measured by original
homestead claims, in the Western United States. Our results from estimated panel regressions indicate
that the underlying rationale for the Homestead Act, namely that economic factors were important for
settlement, was justified. The two most important economic variables, output prices, measured by real
wheat prices, and the cost of capital, measured by real interest rates, were statistically significant in
explaining the change in original homestead claims. Furthermore, contrary to previous studies, railroad
mileage was not found to be significant. The study also reveals that the location of a homestead relative to
the 100th meridian, the traditional boundary of humid and sub-humid areas, had little effect on the
response of homesteaders to economic variables.
Keywords: Homestead Claims, Western Settlement, Wheat Prices, Panel Regression
JEL Codes: C23, N41, N51
*Corresponding Author: Douglas Wills, Milgard School of Business, University of Washington –
Tacoma, 1900 Commerce Street, Campus Box 358420, Tacoma, WA 98402. We thank the participants
of the Western Economic Association International 2011 Annual Conference for helpful comments on a
previous version of this paper.
1
Introduction
One relatively unexplored research area in the development of the American West is the role
economic factors had on the rate of settlement.1 This paper addresses that oversight by analyzing the
impact of changes in crop prices and interest rates on the change in original homestead entries. It is
unique in three respects. First, the cost of capital, measured by real interest rates is included. Second, we
break down the data by individual land offices. Third, we use original homestead entries as our dependent
variable, not planted acreage. Original homestead entries were the first indication that an individual
intended to start a farm, essentially equivalent to a new business. Therefore, the focus is not on whether a
homestead was successful but what impact output prices and interest rates had on the decision to start a
homestead.
The study focuses on land claims by land office within seven states (Kansas, Minnesota,
Montana, Nebraska, North Dakota, South Dakota, and Wyoming) from 1881 to 1907. These states were
chosen because they were similar in terms of their degree of settlement over this time period. This lowers
the likelihood of problems arising from comparing states that were highly settled to those that were less
settled. Furthermore, these states largely break down into two geographical areas (humid and sub-humid)
and were populated, for the most part, by single product crop farms intended for export to the eastern U.S.
and Europe. Over this time period, the Department of the Interior reported original homestead entries by
land office in a consistent format thus improving data reliability.
The results strongly indicate that the underlying rationale for the Homestead Act, namely that
economic factors were an important determinate of settlement, was justified. Both real output prices and
real interest rates were statistically significant in explaining the change in original homestead entries.
Contrary to previous studies, railroad mileage was not found to be significant in settlement decisions.
Railroads seem to have more impact on the success of homesteads rather than a factor in determining the
rate of settlement. Both output prices and interest rates were significant for land claims on each side of the
1
Harley (1978) was the first to explore how U.S. western expansion was related to economic factors. A more recent study was by
Solakoglu (2008). There was, however, a series of papers exploring this issue in Canada, see Norrie (1975), Grant (1978), Marr
and Percy (1978), and Borins (1982).
2
100th meridian, however there was little difference in the degree of response. This is an interesting result
given the importance placed on the role of the semi-arid climate in the development of the west.
Model
The empirical model that is used is a based upon the following equation:
.
Our dependent variable,
(1)
is the total acreage of original homestead entry claims in state i for
year t. The real price of wheat and corn in year t is represented by the variables
measures railroad mileage in state i, while
and
.
represents the real interest rate in year t. Real interest
rates are included in the model to measure the possible costs of settlement that would have arisen from
taking out loans for equipment required to settle new land.
The creation of a homestead can be appropriately modeled as an entrepreneurial decision to create
of a new business. As such, the factors being taken into account are expected output prices, proxied by
current and past prices, and expected input costs. Expected costs obviously include transportation costs,
labor, land, etc. Transportation costs have traditionally been approximated by density of railroads within a
state. There is little data on labor costs and most labor was provided by the owner and family members.
As such, wages in the eastern US or Europe are poor measures of the opportunity cost of labor on farms
in the US west.
Including the cost of capital requires some explanation given that it has not been included in any
previous study where the amount of homestead entries was the dependent variable. As for land, the
Homestead Act provided it at essentially a zero price. However, capital requirements to begin a farm
were significant, even with ‘free’ land. A homesteader had to transport his family to the farm location,
purchase animals and tools to work the land, seed for the crop, plus provide enough food to support the
family until the first crops could be sold in the market.
One estimate put the minimum capital
requirements at $1,000 to begin a homestead (Bogue, 1955, p 4). It should also be noted that while the
3
Homestead Act provided ‘free’ land it did not provide any means of subsidizing the operation of a
homestead. In addition, because the homesteader did not technically own the land for five years he could
not borrow against it.2
As such, a priori, we would expect output prices and interest rates to be
significant in the decision to begin a new homestead.
Panel Regression Results
We first check to see if the time series variables are stationary in levels or if they need to be
differenced. Given that our dataset contains panel data variables, we used the test of Levin, Lin, and Chu
(2002), which assumes a common unit root process among cross sections. For variables which do not
vary by land office or state, we use the conventional ADF test. Table 1 reports the results of the unit root
tests. We fail to reject the presence of a unit root in every variable except wheat and corn prices and all
differenced variables appear to be stationary. We therefore difference all variables with the exception of
crop prices.
The data is fitted to the following regression equation using panel data estimation with panel
corrected standard errors (PCSE) which control for serial correlation and heteroskedasticity.
,
Following Beck and Katz (1995), one common autoregressive term is included. Also included is one lag
of each variable to allow for the possibility that past years conditions would affect the settlers’ decisions
in the current year. The regression is estimated with all of the states pooled together. The results are
presented in Table 2. The coefficient on the lagged price of wheat is positive and significant at the 1%
level. This strongly supports Harley’s original findings and contradicts that of Solakoglu (2008).3 The
estimated coefficients in the real interest rates, both current and lagged, are negative and significant at the
2
This was one rationale for keeping the controversial “commutation” clause in the Homestead Act. This allowed a homesteader
to buy the land after a short period of residing on the land. Late in the 19th Century, this was a source of much fraud.
3
Solakoglu (2008) uses lagged endogenous variables as instruments for the two stage least squares regressions reported in that
work. That approach is not appropriate for our approach given that lags of all variables are already included in the model used in
this paper.
4
1% level. These results strongly support the argument that homesteaders were responding predictably to
market stimuli. The coefficient on the price of corn was significant at the 5% level and with a negative
sign, which follows as corn was an input for most of these states except for Kansas and Nebraska.
Railroad mileage, both current and lagged, was found to be significant but negative. These results are
inconsistent with both Harley (1978) and Solakoglu (2008).
Although railroad mileage has traditionally been used as a proxy for lower transportation costs,
the development of the railroads makes their use as this proxy somewhat problematic. The railroads were
initially built as transcontinental lines, heavily subsidized by the Federal government, and built far ahead
of any settlement. Trunk lines were then added either following settlement or in response to breakdown in
cartel agreements (Norrie, 1975, p 424). For example, see Figure 1 which plots the change in the railroad
mileage for each state as a percent of 1913 totals. The period between 1886 and 1887 is associated with
historically large increases in the railroad mileage in most states. This was caused by a breakdown in a
cartel agreement (Harley, 1982).
To determine whether the above statistically significant results were largely determined by the
surge in railroad mileage during this period, a PCSE regression was estimated using all seven states for
the years after 1887. Those results, reported in Table 3, suggest that there is no relationship between
railroad mileage and homestead claims. This completely contradicts both Harley and Solakoglu. One
possible explanation for this is that both Harley and Solakoglu use planted acreage in their studies.
Planted acreage is affected by the success of homesteads (and other farms) which, one would expect, is
affected by the density of railroads. For our purposes, given the lack of evidence of the effect of railroad
mileage on settlement decisions, the railroad variable was not included in any subsequent regressions.
One of the advantages of using land office data rather than state level data is the ability to restrict
attention to geographic areas which do not follow political boundaries. The 100th meridian, in particular,
was an important geographic boundary which separated the arid west with the humid eastern portion of
the Great Plains. This geographical boundary is considered to be significant in determining the pattern of
western settlement, especially in the high plains of the Dakotas, Minnesota, and Montana (Ottoson et al,
5
1966). As one can see from Figure 2, the 100th meridian bisects the Dakotas. Table 4 contains the results
of regressions which were estimated with land offices east and west of the 100th meridian from the states
Minnesota, North Dakota, South Dakota, and Montana all states where much of the land was devoted to
the production of wheat. Surprisingly, given the emphasis historians have placed on the 100th meridian,
there was little difference in the coefficients. While far from conclusive, this does raise the possibility that
the difference in climate between these areas was not nearly as significant for settlement decisions as
previously thought.
Conclusion
For the first time, this study provides strong evidence that homestead settlement decisions in the
U.S. western states were determined in large part by economic stimuli, such as output prices and the cost
of capital. These results support the underlying rationale for the Homestead Act of 1862 that lowering the
price of land would encourage western settlement. However, given the strong influence of interest rates,
not including any method of financing homesteads and preventing homesteaders from borrowing against
the land may have inadvertently slowed the rate of settlement.
Also, for the first time, this study provides evidence that railroad mileage was not a significant
factor in determining new homesteads. This result contradicts previous studies based on total planted
acreage perhaps indicating that railroads were more important for the long term success of homesteads
rather than in determining the rate of new homesteads.
Finally, little evidence was found that
homesteaders responded differently to economic incentives depending on which side of the 100th
meridian the homestead was located. This lack of difference is surprising given the importance placed
geography in determining settlement patterns in the U.S. west.
6
Appendix: Data Sources
Original Homestead Entries
The reported number of acres of original claims in year t are from July of year t – 1 through June of year
t. The data was collection from “Annual report of the Commissioner of the General Land Office.”
Claims are reported by land offices in each state. Data from a land office was only used if there were 5 or
more annual observations reported. Because the majority of the variables that are used in this paper are
based upon the calendar year, we averaged the number of claims from year t and year t+1 and used that
value as the number of acres of original homestead claims for year t.
Consumer Price Index
The consumer price index was taken from http://www.measuringworth.com/uscpi/.
Grain Prices
The wheat and corn prices were taken from the NBER Macrohistory data set. The annual prices was
taken as the average of the 12 monthly prices. The annualized price was adjusted for inflation by dividing
it by the consumer price index.
Railroad Mileage
Rail
measures railroad mileage in state i in year t as a percentage of total mileage in year 1913
which is the last year that we have data available. Data was retrieved from The Statistical Abstract of the
United States. Before 1889, the mileage for North and South Dakota was reported as one because the
individual states had not yet formed. To estimate the railroad mileage for the individual states, the
proportion of total mileage of each state as a percentage of the total between the two states was calculated
in 1889 and used to divide the total mileage for the two states for the years prior to 1889.
Interest Rates
The interest rates used in this paper are
http://www.measuringworth.com/interestrates/.
the
short
term
interest
rates
reported
by
7
References
Beck, Nathaniel and Jonathan N. Katz, “What to do (and not to do) with Time-Series Cross-Section
Data,” American Political Science Review, 89, No. 3 (1995): 634-647.
Borins, Sandford F., “Western Canadian homesteading in time and space,” Canadian Journal of
Economics, 15, No. 1 (1982): 18-26.
Bogue, Allan G., Money at Interest, the Farm Mortgage on the Middle Border, Ithaca: Cornell University
Press, 1955.
Cooley, T.F. and Stephen DeCanio, “Rational Expectations in American Agriculture,” Review of
Economics and Statistics, 59, No. 1 (1977): 9-17.
Fisher, Franklin M and Peter Temin, “Regional Specialization and the Supply of Wheat in the United
States, 1867-1914,” Review of Economics and Statistics, 52, No. 2 (1970): 134-149.
Gavin, W & A. Theodorou, "A common model approach to macroeconomics: using panel data to reduce
sampling error," Journal of Forecasting, 24, (2005): 203-219.
Granger, C. W. J. & Newbold, P., "Spurious regressions in econometrics," Journal of Econometrics, 2,
(1974): 111-120.
Grant, O., “The rate of settlement of the Canadian prairies, 1870-1911: a comment,” Journal of Economic
History, 38, No. 2 (1978): 471-3.
Harley, C. Knick, “Western Settlement and the Price of Wheat, 1972-1913,” Journal of Economic
History, 38, No. 4 (1978): 865-878.
_________, “Oligopoly Agreement and the Timing of American Railroad Construction,” Journal of
Economic History, 42, No. 4 (1982): 797-823.
Levin, A, C Lin & J Chu, "Unit root tests in panel data: asymptotic and finite-sample properties", Journal
of Econometrics, 108, (2002): 1-24.
Libecap, Gary D. and Zeynep Hansen, “ “Rain Follows the Plow” and Dryfarming Doctrine: The Climate
Information Problem and Homestead Failure in the Upper Great Plains, 1890-1925,” Journal of
Economic History, 62, No. 1 (2002): 86-119.
Marr, W. and M. Percy, “The government and the rate of Canadian prairie settlement,” Canadian Journal
of Economics, 11, No. 4 (1978): 757-67.
Norrie, K. H., “The rate of settlement of the Canadian prairies, 1870-1911,” Journal of Economic History,
35, No. 2 (1975): 410-27.
Ottoson, Howard, Eleanor Birch, Philip Henderson, and A. Anderson, Land and People in the Northern
Plains Transition Area, University of Nebraska Press: Lincoln, 1966.
8
Solakoglu, Ebru Guven, “The effect of railroads and price responsiveness on acreage decisions in the
post-Bellum period,” Applied Economics, 40, (2008): 765-77.
9
Table 1: Unit Root Tests
Variable
LLC
ADF
-0.40
-11.35***
-3.85**
-2.76*
-0.87
-3.59***
-0.90
-6.00***
Note: ***, **, * denote significance at the 1%, 5%, and
10% level respectively. The unit root tests for
included a trend.
10
11
Table 2: Regression Results by all States (1881-1907)
Variable
All States
0.09
(0.35)
0.60***
(2.63)
0.19
(1.33)
-0.30**
(2.12)
-0.98**
(2.23)
-2.20***
(4.81)
-4.85***
(3.93)
-3.89***
(2.64)
Intercept
-1.29**
(2.55)
R2
0.17
Land Offices
58
T
936
Note: Values in parentheses are the absolute value of the z-stats. ***, **, * denote significance at
the 1%, 5%, and 10% level respectively. Although not reported, a dummy variable was included
to control for the effect of the Kincaid Act of 1904 for all regression including land offices from
Nebraska.
12
Table 3: Regression Results for all States (1888-1907)
Variable
0.03
(0.13)
0.42
(1.71)*
0.20
(1.38)
-0.39
(-2.44)**
-0.15
(0.17)
0.53
(0.45)
-5.54
(3.98)***
-5.57
(3.16)***
Intercept
-0.70
(1.12)
R2
0.19
Land Offices
50
T
706
Note: Values in parentheses are the absolute value of the z-stats. ***, **, * denote significance at the 1%,
5%, and 10% level respectively. Although not reported, a dummy variable was included to control for the
effect of the Kincaid Act of 1904 for all regression including land offices from Nebraska.
13
Table 4: Regression Results by State (East and West of the 100th Meridian)
East West - MN,
MN,
MT,
Variable
MT, ND,
ND, SD,
SD WY
WY
0.15
-0.14
(0.40)
(0.60)
0.63
0.61
(1.86)*
(2.89)***
0.15
0.26
(0.71)
(1.81)*
-0.45
-0.42
(2.09)**
(2.91)***
-5.38
-2.50
(2.82)***
(1.87)*
-4.46
-4.52
(2.06)**
(2.79)***
-1.35
-0.69
(1.64)
(1.34)
R2
0.14
0.13
Land Offices
19
16
T
315
292
Intercept
Note: Values in parentheses are the absolute value of the
z-stats. ***, **, * denote significance at the 1%, 5%, and
10% level respectively. Although not reported a dummy
variable was included to control for the effect of the
Kincaid Act of 1904 for all regression including land
offices from Nebraska.
14
Figure 1: Change in Railroad Mileage as a Percentage of 1913 Totals
Figure 2: Land Offices Relative to the 100th
Meridian