Chapter 9 - Late Nineteenth-Century Freight Rates Revisited: Some Evidence from the British Coastal Coal Trade

Summary

The study of maritime freight rates has a substantial and honourable ancestry. Indeed, its honour was recently much enhanced by the award of the Nobel Prize in Economics to one of the subject's progenitors. As long ago as 1914 C.K. Hobson drew up “a freight index number” from 1870 to 1912 to calculate the contribution of shipping earnings to Britain's balance of payments. Isserlis in 1938 developed an index of tramp shipping freights from 1869 to 1914. In the early 1950s Alec Cairncross drew on the work of both Hobson and Isserlis to calculate three indices of freight rates - inward, outward and composite. The early interest in freights arose from a wish to calculate foreign exchange earnings from shipping as one component of Britain's invisibles, but later work has laid emphasis upon the theoretical benefits a reduction in ocean freight rates is likely to have had on international trade and hence regional specialization and economic growth. A lowering of freight rates is a social saving and could be calculated as a proportion of national income, as another Nobel Laureate, Robert Fogel, did with railway rates in America. In addition, assuming reasonably competitive markets, if freight rates fell they would likely have caused a commensurate drop in the delivered price of the commodity carried, which in turn should have spurred demand (assuming a degree of price elasticity). Hence, output would be expanded, perhaps extracting economies of scale, adopting new technology or improving methods of organization - and thus reducing unit cost. This may then have led to another beneficial spiral.

Similarly, a reduction in transport costs may have opened some markets previously closed to a particular good because the final price, including the freight charge, was too high to compete. These new markets would have created additional demand, again perhaps stimulating improved methods of production or extraction and hence lowering unit costs, and thus into the same beneficent loop. In addition, reductions in transport costs might have allowed local monopolies to be breached, bringing competition to rigid markets and hence reducing prices. It has been postulated that one important contributory factor in opening the American west to grain production was the relatively inexpensive transport provided by railways and steamships which enabled Midwest wheat to penetrate European, and especially English, markets. This was a classic effect of a long-term reduction in transport costs, part of which was transatiantic freights.