This study provides causal evidence that a shock to the relative supply of inputs to production can (1) affect the direction of technological progress and (2) lead to a rebound in the relative price of the input that became relatively more abundant (the strong induced-bias hypothesis). I exploit the impact of the U.S. Civil War on the British cotton textile industry, which reduced supplies of cotton from the Southern United States, forcing British producers to shift to lower-quality Indian cotton. Using detailed new data, I show that this shift induced the development of new technologies that augmented Indian cotton. As these new technologies became available, I show that the relative price of Indian/U.S. cotton rebounded to its pre-war level, despite the increased relative supply of Indian cotton. This is the first paper to establish both of these patterns empirically, lending support to the two key predictions of leading directed technical change theories.

Can a temporary economic shock to an important local industry influence long-run city population? To answer this question I study the large temporary shock to British cities caused by the U.S. CivilWar (1861–1865), which reduced cotton supplies to Britain’s important cotton textile industry. I show that this event temporarily reduced the growth rate of cities specializing in cotton textile production, relative to other English cities, and led to a persistent change in the level of city population.