The Transformation of the Texas Economy

Overview: Empresarios, Grangers, Railroaders, Wildcatters and Dot-commers

Two centuries ago Texas was a sparsely populated and desolate backwater on the distant frontier of the waning Spanish empire, decades away from joining the emerging nation that grew out of the thirteen British colonies on the eastern shore of North America.

Today the Texas economy is large, diverse and dynamic, boasting a gross state product (GSP) valued at almost $925 billion in 2005. If the Lone Star State were an independent country, it would have the tenth largest national economy in the world--just behind Spain and Canada, and ahead of Brazil, the Republic of Korea, and India--according to data from the World Bank.

The actual unfolding of the transformation of the Texas economy was wholly unpredictable at the beginning of the 1800s when the territory was still a dangerous, desolate and dusty outpost, well beyond the frontier of substantial European settlement. Only in the last decades of the 19th century did the potential of the territory as an economic and political powerhouse begin to reveal itself. But, the growth of the cotton industry, the development of railroads and the discovery of large quantities of oil were only the first of a series of dramatic transformations that would make the Lone Star State the economic powerhouse it is today.

A combination of unexpected bounty in the form of mineral wealth and other resources, growing integration into the national economy of the United States (which itself underwent its own series of transformations), the growth of the service economy and the high technology industry, and the state's increasingly important geographic position at one of the frontiers of an extensive free trade area that includes Mexico and Canada, have all contributed to the ongoing transformation of the state.

1800 to Independence: Empresarios and early settlement

In the early days of exploration and settlement by the Spanish, Texas represented a vast, unsecured, and sparsely populated territory with little immediate economic or political value. Over almost three centuries from approximately 1519 (when Spanish explorers first came to Texas) to 1800, the Spanish established only a few, relatively small settlements in the territory. Spain's military authority over that time was limited and uneven, sometimes eclipsed by aggressive and powerful indigenous groups like the Apaches and Comanches.

Vast spaces and sparse settlement made any claim to the territory tenuous. In 1803, only three years after the French wrested the territory of Louisiana from weak Spanish control, they sold it to the United States. The new owners then claimed that the territory's southwestern border was the Rio Grande (known to Mexicans as the Rio Bravo).

This raised Spanish concern that the territory west of the Sabine River needed to be populated with Spanish subjects--"facts on the ground," as we say today. The limited progress made by the Spanish in populating the Texas territory by the first decade of the 1800s easily came undone during the early struggles for independence from Mexico (1811 to 1813). By the time of Mexico's ultimate independence in 1821 the Texas territory had even fewer persons of Spanish descent than at the turn of the century--probably fewer than 5,000.

During the first two decades of the nineteenth century the people of the territory remained quite poor, even by frontier standards. The territory was too vast and under-populated for significant wealth generating commerce to thrive. The population and the economy was largely sustained by the Spanish military, which had sent garrisons to defend the territory from encroaching Anglos and hostile natives.

Stephen F. Austin

After independence a period of relative tranquility settled over Texas as the new Mexican government focused on establishing a constitution, laws and state-level administration. The territory of Texas was joined with Coahuila to become the state of Coahuila y Tejas.

Meanwhile, immigration from the United States--mainly from Tennessee--continued to swell the Anglo population. The settlement founded by Moses Austin in 1820 and later managed by his son Stephen grew steadily. Stephen sought and won approval for a law under the newly independent Mexican government that promoted the development of settlements by granting large tracts of land to agents who recruited colonists to the territory. This was known as the empresario system, and the agents were called empresarios.

Approximately 30 or more six-year empresario contacts were awarded beginning in 1825, providing compensation to the empresarios for up to 9,000 immigrant families. The empresario contracts covered vast areas of Texas territory, effectively denying the state government the authority over disposition of these lands for the six-year period of the contracts. These empresario contracts represented the main legal mechanism by which property in the public domain was put into private hands.

Still, because they provided land to settlers at very low cost, and required that the individual acquirers inhabit and cultivate the land, they had a broad democratizing effect. Concentration of land ownership and land speculation--common in other parts of the frontier in the United States--was largely absent in Coahuila y Tejas.

The late 1820s and 1830s were characterized by growing political tension despite--and perhaps because of--the deepening economic development in the territory. The population of Texas in 1820 was about 7,000, not much greater than it was in the first years of the century. But, during the colonization period after Mexican independence from Spain (1821-1835) the population of Texas grew at a considerable rate, if admittedly from a very low base. The non-native population grew more than ten-fold from about 2,000 at the time of Mexican independence to an estimated 20,000 in 1831.

Population growth through immigration primarily from the United States seemed to accelerate in the early 1830s despite the considerable political turmoil caused by factional struggles over political control of the huge expanse of territory that constituted the state of Coahuila y Tejas.

By 1834 the Texas population (including slaves) was estimated at 24,700. Just two years later in 1836--the year of Texas independence from Mexico--the non-native population was estimated at about 38,470. Including the estimated 14,200 natives brought the total population to well over 50,000.

Many factors on both sides of the U.S.-Mexico border--then formed by the Sabine River which separates the states of Texas and Louisiana today--contributed to the considerable growth in the number of colonists from the United States. Still, it seems that the much lower cost of land in Texas than in frontier areas of the United States, combined with the formal land grant system, were major factors.

Independence & Early Statehood: Cotton and slaves

Cotton Season--A Busy Day in Belton, Texas

From independence to early statehood the Texas population continued to swell, exceeding 212,000 inhabitants (154,034 whites, 58,161 slaves, and 397 freed African Americans) in the new state’s first U.S. Census in 1850.

Most of the new immigrants came from southern states, especially Tennessee, Virginia and Georgia. Representatives of these three states alone formed a majority in the constitutional convention that produced the state Constitution of 1845. Reflecting the Jacksonian political culture and agricultural economic interests of these settlers, that first state constitution prohibited banking and made the formation of private corporations very difficult.

These southern immigrants also brought with them their preference for and expertise in growing cotton. As cotton was a labor intensive crop, southern immigrants brought increasing numbers of slaves. A census of the state in 1848 reported 42,455 slaves in the state. But just two years later, the U.S. Census of 1850 counted 58,161 slaves.

In the ten years from 1849 to 1859 production of cotton multiplied more than sevenfold, from 58,073 bales (each weighing 500 pounds) to 431,645 bales. As cotton production blossomed, so did slavery – an Anglo American institution that had previously been only tolerated by Mexican authorities, and which was relatively limited at the time of independence. The Census of 1860 showed that sixty-four counties had 1,000 slaves or more, and all but eight of those counties produced 1,000 bales or more.

Civil War to World War II: "King Cotton," railroads and oil

From the end of the Civil War through the turn of the century, cotton production continued to increase dramatically as a result of several key developments. These included massive immigration from the deep South and Europe, removal of natives from prime cotton-growing areas, the invention of a new plow that more easily broke the thick black sod of the plains, the invention of barbed wire, the extension of railroads, the invention of cotton ginning (removal of seeds from cotton fibers and cleaning and baling of the lint), and perfection of cotton compressing at the side of railroads for easier shipping.

Clearly, "King Cotton" became a central feature of the Texas economy, attracting considerable investment capital, labor power, and technological development. Other industries within the broader agricultural sector also grew considerably in late nineteenth century Texas, including ranching, timber, and corn. Still, cotton was king until the 1920s when it began a decades long decline in importance caused by the drop in demand during the Great Depression, the loss of labor power during World War II, the rise of other centers of cotton production abroad, and federal efforts to hold down production to maintain prices.

As the railroads extended their reach in the late nineteenth century across the state to the panhandle and the high plains of west Texas, their influence grew. At first, the combination of more extensive railroad service and the relocation of cotton compresses from the seaports to rail sidings helped cotton farmers break the power of the port facility operators. But, hostility and political competition between farmers and ranchers on the one hand and the railroads on the other quickly grew.

Because railroads tend to be natural monopolies (in which the huge cost of investment makes it inefficient to have more than one service provider in a particular area), they tended to exercise enormous market power over their customers--the farmers and ranchers. The railroads' power to set rates was perceived as injurious to farmers and ranchers.

The struggle between railroads and their customers led to the victory of James Stephen Hogg in the gubernatorial election of 1890. Hogg ran chiefly on a populist platform whose main plank was the promise to regulate the railroads. In that same election a proposed amendment to the Texas constitution was ratified that permitted the creation of a railroad regulating body that among other things would regulate freight rates. Hogg made the first appointments to the new Texas Railroad Commission in 1891. Three years later in 1894 the Legislature made those positions elective.

The creation of the Railroad Commission represented the most significant and direct political clash between competing economic interests since the Civil War pitted slaveholding cotton growers against northern industrialists. Governor Hogg pushed through a series of laws, known as "Hogg's Laws," aimed at reining in the railroads, out-of-state corporations, and insurance companies.

As cotton began its long decline in the early decades of the twentieth century, oil began to assume increasing prominence. Though commercial oil exploration had enjoyed some limited success in the post-Civil War era, the industry did not make major discoveries until the late 1890s and the first years of the new century.

Oil Gusher, Beaumont, Tex.

As sizable discovery followed sizable discovery, a fully integrated industry began to take shape, including pipelines and oil refineries on the Gulf Coast. Then, as Henry Ford and other manufacturers turned the automobile with its the internal combustion engine into an object of mass consumption, the Texas oil industry came into its own. By 1929 there was already one automobile in the state for every 4.3 of the almost six million Texans. Also by 1929, the four states of Texas, Oklahoma, Louisiana and Arkansas accounted for approximately 60 percent of oil production in the United States.

The success of the oil and natural gas industry helped diversify the state economy, which until the first quarter of the century was still dominated by agriculture. The dominance of that sector by cotton continued, but to a lesser degree than in the earlier period. Cotton prices had tumbled, while new fruits and vegetables, harvested by increasing numbers of migrant Mexican workers, grew in importance. While white and black Texans also worked in the itinerant farm labor pool, Mexicans became the backbone of the industry.

Modern Texas Economy: Travel, retail, and technology

Oil and natural gas production bestowed new economic importance and diversity on the Texas economy. Nevertheless, they only reinforced the state's reliance on the production of so-called "primary goods"--mining (including oil and natural gas production), timber, agriculture and ranching. It would take a World War, followed by a post-war national economic boom, to really build a significant base for industrial production, create several transportation hubs in the new air travel industry, and establish the state as a platform for high technology research and development.

The energy sector is still prominent among Texas industries, as are ranching, agriculture, and agriculture related industries like cotton ginning. But other industries such as airlines, travel and entertainment, and technology (including computers, aerospace, and telecommunications) have grown to considerable prominence.

In part these industries have enjoyed considerable encouragement and dollars from the federal government--particularly the aerospace industry. National and even international politics played important roles here. The arms and space races with Cold War foe the Soviet Union led to creation of the NASA facility near Houston. In turn, the aerospace industry has spawned growth in related industries such as telecommunications, information technology, and the airline industry and travel reservations industries. The airline and air travel industry has been a particular beneficiary of the fortuitous location of Texas roughly halfway between the two coasts, as well as from the state's burgeoning and increasingly urbanized population.

Some of the largest companies operating in the state in other important industries, such as retail and manufacturing (e.g., CVS Pharmacy, Office Depot, Safeway, Coca-Cola, and International Paper), generally are not headquartered in Texas. Still, these companies represent considerable levels of employment and production. The prominence of these out-of-state corporations in Texas reflects the increasingly integrated nature of the national economy.

This integration was facilitated in part by the creation of the interstate highway system, which was initiated under 1956 legislation creating the National System of Interstate and Defense Highways, ostensibly for the rapid movement of troops and materiel for defense of the national territory. The interstate highway system gave a considerable boost to the development of corporate restaurant chains. The prominence of numerous corporate chain restaurant companies (including Church's, Popeye's, Chili's, Red Lobster, and Luby's, and others) among the state's top employers in recent years confirms the symbiotic relationship of the dining and entertainment sector to the national highway system. The size of these corporate restaurant chains also reflects the explosion of suburbs and exurbs across the state, which was in turn facilitated by extensive highways.

The development of this emerging socio-economic complex--whose key components included petroleum, automobiles, highways, suburbanization, and chain retail and restaurants--was reinforced by forces already operating within the state. The Texas Good Roads and Transportation Association had already been established in 1932 to promote public expenditure on the building and maintenance of roads in Texas.

As early as 1946--well before President Eisenhower's push for a national highway system--the Good Roads Association was instrumental in pushing through the 1946 "Good Roads Amendment" to the Texas Constitution (see the chapter on the Texas Constitution). This amendment required that three-quarters of all revenue from state gasoline taxes be "used for the sole purpose of acquiring rights of way, constructing, maintaining, and policing... public road ways" and for the administration of traffic safety laws.

Although Texas-based companies are not so dominant in other economic sectors, they do represent some of the leading businesses in their industries. The high-technology sector includes such recognizable names as personal computer manufacturer Dell Computer Corporation (based in Round Rock, Texas), telecommunications giant AT&T (bought in 2005 by Southwestern Bell Communications headquartered in San Antonio), and chip maker Texas Instruments (Dallas). All three companies are among the top 100 employers in Texas.

Dell Headquarters, Round Rock Texas

In the retail sector several of the biggest employers are headquartered in the Lone Star State. These include: 7-Eleven, Inc. based in Dallas, J.C. Penney Company (which also owns Eckerd Drug) based in Plano, Radio Shack in Fort Worth, and Winn Dixie also based in Fort Worth. In the services and finance sectors two Texas based companies are notable for being large employers. Administaff is based in Kingwood, while Cullen Frost Bankers claims San Antonio as home.

This brief list of industries and companies conveys just how large and diverse the economy of Texas really is today.





"Texas in the age of Mexican Independence." The Handbook of Texas Online. 

"Mexican Colonization Laws." The Handbook of Texas Online. 

"Census and Census Records." The Handbook of Texas Online. 

"Anglo American Colonization." The Handbook of Texas Online. 

"Antebellum Texas." The Handbook of Texas Online. 

"Cotton Culture." The Handbook of Texas Online. 

The National Grange, 

"Grange." The Handbook of Texas Online. 

"Texas in the 1920s." The Handbook of Texas Online.