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1/7/97

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Economic historians ask: How natural were American natural resources?

Gold and silver are not the produce of North America, which has no mines.

­ Benjamin Franklin, 1790

The North Atlantic countries are not really populated by people especially virtuous or specially noble, industrious or gifted, or even especially acquisitive; they happen to be countries which had a geological history favorable to the formation of mineral deposits, and upon this lucky foundation has been built their industrial structure.

­ H.H. Read, British geologist, in 1952

In its brief history, the United States has been called both mineral poor and mineral rich. Two Stanford economic historians suggest either characterization hides an important fact ­ the value of the earth's natural endowment of elements on the periodic table is partly manmade.

The United States started to become rich after the Civil War with mining, say Paul David and Gavin Wright, both Stanford professors. It quickly became the world's leading mineral producer, which fueled its industrial growth. But this success was based in part on adaptive new technologies that made its natural endowment grow bigger.

Their recently published thesis challenges the thinking of many economists and conservationists who visualize a country's natural resource endowment as something fixed and given by nature alone.

"The idea of thinking of a natural resource base as something that is given and fixed in extent has to be qualified," David said. "The economically relevant resource base can grow as a result of new discoveries and through improved technologies of extraction and refinement or processing. Access to better scientific understanding and engineering knowledge applied in those areas and institutions that effectively channel market incentives toward exploration and commercial utilization can be just as important ­ if not more important ­ than a country's 'natural' geological endowment."

Mineral poor at first

In Benjamin Franklin's day, colonial settlers thought they had an abundance of land but virtually no mining potential, David and Wright say in their brief history of American mining, published last summer by Stanford's Center for Economic Policy Research.

After the Civil War, mining exploded not just in the newly settled West but in the original colonies, and the United States became known as an especially mineral-rich country. Well into the 20th century, America's growing manufacturing prowess was based upon increasingly intensive use of natural resources, and this was reflected in the rising resource content of the country's manufactured exports during the period 1880-1929. That trend was first identified in 1970 in a doctoral thesis by Mary Locke Eysenbach, a graduate student who worked with David. Eysenbach was the first woman to be awarded a doctorate in economics at Stanford in 75 years. Building on her pioneering study, Wright confirmed this feature of America's industrial success in a widely-recognized article published by the American Economic Review in 1990.

Intrigued by the question of what conditions underlie abundant supplies of mineral resources, David and Wright began to search old and new geological reports. When they tallied up the globe's confirmed and suspected mineral deposits, including ones that had been mined out in the United States by that time, they discovered that the country wasn't well endowed with minerals compared to many other countries. Today, for example, it is believed the United States has just 8 percent of the world's iron ore, whereas in 1910, a quarter of the world's known iron ore reserves were in the United States and 70 percent of the estimated potential reserves were also thought to be here.

Many other countries had significant mineral endowments but they remained unknown because those countries weren't as quick to discover or use them, Wright said. Until the 1960s, for example, Australians accepted a number of rationalizations for why they had found so few minerals. In hindsight, he said, it looks as though "Yankee optimism" ­ a cultural factor ­ was "as important as hard rock" to U.S. natural resource development.

The Spanish explorers, of course, were optimistic too, without nearly the same success. "The Spanish were fixated on finding precious metals and seem to have had the idea they would be obvious when they did find them," Wright said.

Maps to buried treasure

The American approach was different, according to David and Wright. Early in the 19th century, Americans began to take the view that geologists and topographers held "maps to buried treasure" and they were easy to convince that public money should be spent on geological mapping. By 1860 nearly every state had sponsored a geological survey, and the United States Geological Survey, founded in 1879, became the most productive governmental research agency of the 19th century. "The payoff to its early topographical and metallurgical work had a lasting impact on popular appreciation of the practical benefits of scientific research," David and Wright have written.

American experts found many mineral deposits that weren't economically valuable at the time. Some had no known uses, others were too remote from markets or too low in quality.

The anthracite coal fields in eastern Pennsylvania weren't considered a valuable resource, for example, until someone figured out how to burn anthracite in place of higher grades of coal, David said. Uranium wasn't seen as valuable until relatively recently.

Even the value of the South's softwood forests grew, David noted, after it was discovered that timber could be treated with creosote, a coal tar, to make the wood resistant to weathering, so it could be used for railroad ties and telephone poles.

In this way, David said, "there has been an enormous expansion of the world's resources even though we know they are being depleted."

"The more you look for things and the more you are mining them in a particular area, the more resources you discover in those areas. There are increasing returns ­ not forever but for a period ­ and that's a counter-intuitive way of thinking about natural resources."

In some ways, it seems obvious that more looking leads to more finding, but economic literature has not grasped this point about natural resources, Wright said, and neither did the great British mining industry that preceded America's.

"British leadership in coal goes back to the 16th century, and they built up great expertise in mining and a transportation system," he said. But as late as 1947, the British government had just 58 experts in geology stationed in its far-flung empire.

"The British built up a great working knowledge of coal, mainly stored in the heads of coal men. That sort of knowledge can be very useful, but it was not codified, not written down in a form that lends itself to teaching others in a classroom," Wright said.

The first U.S. mining experts were educated in Europe but Columbia College in New York opened a school of mines in 1864 and more than 20 U.S. schools were granting mining degrees by 1890. By 1903, the University of California boasted that, with 300 mining students, it was "without doubt the largest mining college in the world."

Herbert Hoover, perhaps the world's most famous mining engineer and an alumnus of Stanford, was "the epitome of the American approach" to mining, Wright said, mixing business skills with engineering knowledge. While the Europeans trained mining engineers to serve as inspectors and regulators, American engineers increasingly assumed managerial and executive roles within large firms.

Self-educated American miners and prospectors resisted the college influence, but attitudes changed when geologists came up with quicker ways to locate petroleum, David and Wright say. "Certain people on the earth science faculty at Stanford have been responsible for more sophisticated theories about how to locate oil," David said. "As this type of knowledge allows you to reduce the costs of exploration, the amount of known reserves expands."

In essential respects, he and Wright say, "the minerals economy was an integral part of the emerging knowledge-based economy of the 20th century." In an absolute sense, natural resources are determined by geologic and climatic conditions still beyond human control, but a comparative history of their use in countries would show great variability in their economic value, they say.

"The value of those resources and even the resources that are known to exist as economic assets are really determined by a combination of society's access to ecological knowledge, its endowment of human skills and trained people, and the institutional structure and legal systems that create incentives to use them," David said.

Lessons for other countries

For countries such as those of the former Soviet Union, which are now attempting to build a market economy, there are some important lessons, he said.

"The mineral assets of Russia are being exploited now in a way that is very export-oriented. They are controlled by a relatively small clique of former members of the state apparatus and since this is a large source of foreign exchange, it is also the basis for these groups getting their hands on a lot of assets."

They are using those assets, he said, to take control of the domestic banking industry, rather than plowing the earnings into domestic industrialization.

Americans exported minerals but they also invested in developing new ways to process them for manufactured goods. "They sold not only crude oil but built an organic chemistry industry that was designed to use petroleum" at a time when Germany dominated the chemical industry using coal tar derivatives, he said.

If countries don't take that approach, he said, their natural resource wealth eventually is used up or the market shifts to reliance on another resource.

Copies of David and Wright's paper, titled "Increasing Returns and the Genesis of American Resource Abundance," are available from the Center for Economic Policy Research, (415) 725-6668.

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By Kathleen O'Toole


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