“We have inherited from the literature on the post-bellum South the image of a society ruled by force and violence, divided by racism and class distinctions, immobilized by ignorance and agrarian traditions. There is, of course, a large element of truth in all this. But too often this image has paralyzed critical thought, especially about the workings of the southern economy and the “success” of its performance.”
Robert Higgs, 1971, “The Transformation of the American Economy“
Leading national journalist Ray Stannard Baker, whose belief in social reform led to a close personal and professional relationship with Woodrow Wilson, wrote in 1908 about opposing influences he saw in the South. His comments on the way in which white people were torn between their feeling of racial prejudice and their downright economic needs has led to stimulating discussion across a variety of contexts. Economic historian Robert Higgs from the University of Washington weighs the relative strengths of these opposing influences at the turn of the 20th century in his investigation on the organization of southern agriculture enterprise.
FACT: Black farmers in 1910 were less frequently owners and more frequently tenants than white farmers
1) What determined the distribution of farm rental contracts between share-rent and fixed-rent forms, and did the tenant’s race influence the form of rental contract he obtained?
2) What effect did the race of the farmers and the form of their land tenure have on the determination of farm size?
Race, Risk and Share Tenancy
Black tenants: 57% paid landlord a share of the product as rent; land cultivated under share contracts comprised 51% of all land cultivated by black tenants
White tenants: 74% paid share rents; land cultivated under this arrangement constituted 64% of the land cultivated by white tenants
Higgs notes that the higher frequency of share-rent contracts among whites is due in part to white farmers being disproportionately located in areas where contracts were relatively concentrated in the share-rent form for both races. So assuming that racial differences did not determine the form of rental contract, what did?
It’s all about Risk
The foundation of Higgs’ hypothesis dates to US Department of Agriculture research in the early 1910’s and 1920’s in which they asserted that the relative prevalence of share-rent contracts is directly related to the level of yield risk.[1][2] Given that both landlord and tenant are risk averse, their goal is to pass on the risk of crop contingencies to the other party. They each benefit if the land yields more than expected and in contrast, they each minimize their losses if the land has a bad year.
Assuming that both parties would rather not take on any risk, it’s important to understand how the market gives each party incentive to negotiate. The least risky contract from a landlord’s perspective is to charge the tenant a fixed amount each year. In this situation, the tenant assumes 100% of the risk – he has to pay a stated dollar amount regardless of whether crops yield $1,000 or $1. But since the tenant is also risk averse, it’s in their best interest to negotiate a contract that transfers some of that risk to the landlord.
It follows that the expected value of share rents always exceeds the value of fixed rents because this is how the market compensates the landlord for giving up a guaranteed annual payment. Consequently, the number of parties willing to set share-rent contracts shrinks as the rental difference grows.
D = E(Share-rent) – Fixed-rent
[1] USDA Bulletin No. 337, January 13, 1916, “A Study of the Tenant Systems of Farming in the Yazoo-Mississippi Delta”
[2] Texas Agricultural Experiment Station Bulletin No. 278, April 1921, “Farm Tenantry in the United States”
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