Economic history of the United States

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The economic history of the United States is about characteristics of and important developments in the U.S. economy from colonial times to the present.

The emphasis is on economic performance and how it was affected by new technologies, the change in size of economic sectors and the effects of legislation and government policy.


Colonial economy[edit]

Shipping scene in Salem, Massachusetts, a shipping hub, in the 1770s

From 1700 to 1775 the output of the colonies increased 12 fold, giving the colonies an economy about 30% the size of Britain's at the time of independence. The free white population of the colonies enjoyed the highest standard of living in the world. Population growth was responsible for over three-quarters of the economic growth of the British American colonies. There was very little change in productivity and little in the way of introduction of new goods and services.


Initial colonization of North America was extremely difficult and the great majority of settlers before 1625 died in their first year. Settlers had to depend what they brought with them or on uncertain shipments of food, tools and supplies until they could build shelters and grow enough food and establish gristmills, sawmills, tanneries, iron works and blacksmith shops to be self-supporting. They also had to defend themselves against hostile Native Americans. After permanent settlements were established population growth of the North American British colonies was very rapid due to high birth rates (8 children per family versus 4 in Europe), lower death rates than in Europe, and immigration.[1] The long life expectancy of the colonists was due to the abundant supply of food and firewood and the low population density that limited spread of infectious diseases. The warmer climate of the colonies compared to Europe also contributed to longer life expectancy; however, the death rate from diseases was higher in the warm, humid southern colonies than in New England.

The higher birth rate was due to better employment opportunities. Many young adults in Europe delayed marriage for financial reasons. Also there were many servants in Europe who were not permitted to marry.[2] The population of white settlers grew from an estimated 40,000 in 1650 to 235,000 in 1700. In 1690 there were an estimated 13,000 black slaves. The population grew at an annual rate of over 3% throughout the 18th century, doubling every 25 years or less.[3] By 1775 the population had grown to 2.6 million, of which 2.1 million were white, 540,000 black and 50,000 Native American, giving the colonies about one third of the population of Britain. The three most populated colonies in 1775 were Virginia, with a 21% share, and Pennsylvania and Massachusetts with 11% each.

The economy[edit]

The colonial economy of what would become the United States was pre-industrial, primarily characterized by subsistence farming. Farm households also were engaged in handicraft production, mostly for home consumption, but with some goods sold.[4]

The market economy was based on extracting and processing natural resource and agricultural products for local consumption, such as mining, gristmills and sawmills, and the export of agricultural products. The most important agricultural exports were tobacco, wheat, Indian corn, indigo. Tobacco was a major crop in the Chesapeake Bay region and rice a major crop in South Carolina. North Carolina was the leading producer of naval stores, which included turpentine (used for lamps), rosin (candles and soap), tar (rope and wood preservative) and pitch (ships’ hulls). Another export was potash, which was derived from hardwood ashes and was used as a fertilizer and for making soap and glass.

The colonies depended on Britain for many finished goods, partly because laws prohibited making many types of finished goods in the colonies. These laws achieved the intended purpose of creating a trade surplus for Britain. The colonial balance trade in goods was heavily in favor of Britain; however, American shippers were able to offset roughly half of the goods trade deficit with revenues earned by shipping between ports within the British Empire.[5]

The largest non-agricultural segment was ship building, which was from 5 to 20% of total employment.[6] About 45% of American made ships were sold to foreigners.[4]

Exports and related services accounted for about one-sixth of income in the decade before revolution.[7] Just before the revolution, tobacco was about a quarter of the value of exports. Also at the time of the revolution the colonies produced about 15% of world iron.[8] The mined American iron ores at that time were not large deposits and were not all of high quality; however, the huge forests provided adequate wood for making charcoal. Wood in Britain was becoming scarce and coke was beginning to be substituted for charcoal; however, coke made inferior iron.[9] Britain encouraged colonial production of pig and bar iron, but banned construction of new colonial iron fabrication shops in 1750, but the ban was mostly ignored by the colonists.[10]

Settlement was sparse during the colonial period and transportation was severely limited by lack of roads; consequently most towns were located on or near the coasts or navigable inland waterways. Even on improved roads, which were rare during the colonial period, wagon transport was very expensive. Economical distance for transporting low value agricultural commodities to navigable waterways varied but was limited to something on the order of less than 25 miles.[11] In the few small cities and among the larger plantations of South Carolina, and Virginia, some necessities and virtually all luxuries were imported in return for tobacco, rice, and indigo exports.[12]

By the 18th century, regional patterns of development had become clear: the New England colonies relied on shipbuilding and sailing to generate wealth; plantations (many using slave labor) in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo; and the middle colonies of New York, Pennsylvania, New Jersey, and Delaware shipped general crops and furs. Except for slaves, standards of living were generally high—higher, in fact, than in England itself.[13]

The New England region's economy grew steadily over the entire colonial era, despite the lack of a staple crop that could be exported. All the provinces and many towns as well, tried to foster economic growth by subsidizing projects that improved the infrastructure, such as roads, bridges, inns and ferries. They gave bounties and subsidies or monopolies to sawmills, grist mills, iron mills, pulling mills (which treated cloth), salt works and glassworks. Most important, colonial legislatures set up a legal system that was conducive to business enterprise by resolving disputes, enforcing contracts, and protecting property rights. Hard work and entrepreneurship characterized the region, as the Puritans and Yankees endorsed the "Protestant Ethic", which enjoined men to work hard as part of their divine calling.[14]

The benefits of growth were widely distributed in New England, reaching from merchants to farmers to hired laborers. The rapidly growing population led to shortages of good farm land on which young families could establish themselves; one result was to delay marriage, and another was to move to new lands farther west. In the towns and cities, there was strong entrepreneurship, and a steady increase in the specialization of labor. Wages for men went up steadily before 1775; new occupations were opening for women, including weaving, teaching, and tailoring. The region bordered New France, and in the numerous wars the British poured money in to purchase supplies, build roads and pay colonial soldiers. The coastal ports began to specialize in fishing, international trade and shipbuilding—and after 1780 in whaling. Combined with growing urban markets for farm products, these factors allowed the economy to flourish despite the lack of technological innovation.[15]

Political environment[edit]


The colonial economies of the world operated under the economic philosophy of mercantilism, a policy that attempted to run a trade surplus in order to accumulate gold reserves. The colonial powers of England, France, Spain and Holland tried to protect their investments in colonial ventures by limiting trade between each other's colonies. A mercantile policy that affected the British American colonies was the Navigation Acts which were passed by the British Parliament between 1651 and 1673.

Important features of the Navigation Acts were:

Although the Navigation Acts were enforced, they had a negligible effect on commerce of profitability of trade.

On the eve of independence Britain was in the entering early stage of the Industrial Revolution, with cottage industries and workshops providing finished goods for export to the colonies.

Free enterprise[edit]

The domestic economy of the British American colonies enjoyed a great deal of freedom, although some of their freedom was due to lack of enforcement. Adam Smith used the colonies as an example of the benefits of free enterprise.[16] Colonists paid minimal taxes.

Some colonies, such as Virginia, were founded principally as business ventures. England's success at colonizing what would become the United States was due in large part to its use of charter companies. Charter companies were groups of stockholders (usually merchants and wealthy landowners) who sought personal economic gain and, perhaps, wanted also to advance England's national goals. While the private sector financed the companies, the King also provided each project with a charter or grant conferring economic rights as well as political and judicial authority. The colonies generally did not show quick profits, however, and the English investors often turned over their colonial charters to the settlers. The political implications, although not realized at the time, were enormous. The colonists were left to build their own lives, their own communities, and their own economy.

French and Indian War[edit]

The most important conflict involving the British American colonies was the French and Indian War (1754–63), which was the American theater of the Seven Years' War.


The colonial government had few expenses and taxes were minimal.

Although the colonies provided an export market for finished goods made in Britain or sourced by British merchants and shipped from Britain, the British incurred the expenses of providing protection against piracy by the British Navy and other military expenses.

 An early tax was the Molasses Act of 1733.  Taxes increased sharply in 1763 to cover expenses of the French and Indian War.[17]  New taxes included the Sugar Act of 1764, the Stamp Act of 1765 and taxes on tea and other colonial imports.  

The burden of direct taxation was much less significant compared to the cost imposed by the Navigation acts, which were less visible and rarely complained about.

The American Revolution and the new nation[edit]

Political developments[edit]

The American Revolution[edit]

Americans in the Thirteen Colonies demanded their rights as Englishmen, as they saw it, to select their own representatives to govern and tax them – which Britain refused. The Americans attempted resistance through boycotts of British manufactured items, but the British responded with a rejection of American rights and the Intolerable Acts of 1774.[18] In turn, the Americans launched the American Revolution, resulting in an all-out war against the British and to independence for the new United States of America. The British tried to crush the American economy with a blockade of all ports, but with 90% of the people in farming, and only 10% in cities, the American economy proved resilient and able to support a sustained war, which lasted from 1775 to 1783.[19]

Revolutionary era cartoon showing US sawing of the horn of a cow (symbolizing a break from British commerce) with a distressed Englishman watching as other European powers wait to collect milk. The cartoon represents the commercial status of the US during the Revolution.

The American Revolution (1775–1783) brought a dedication to unalienable rights to "life, liberty, and the pursuit of happiness", which emphasize individual liberty and economic entrepreneurship, and simultaneously a commitment to the political values of liberalism and republicanism, which emphasize natural rights, equality under the law for all citizens, civic virtue and duty, and promotion of the general welfare.

Britain's war against the Americans, French and Spanish cost about £100 million. The Treasury borrowed 40% of the money it needed and raised the rest through an efficient system of taxation.[20][21] Heavy spending brought France to the verge of bankruptcy and revolution.

Congress and the American states had no end of difficulty financing the war.[22] In 1775 there was at most 12 million dollars in gold in the colonies, not nearly enough to cover existing transactions, let alone on a major war. The British made the situation much worse by imposing a tight blockade on every American port, which cut off almost all imports and exports. One partial solution was to rely on volunteer support from militiamen, and donations from patriotic citizens. Another was to delay actual payments, pay soldiers and suppliers in depreciated currency, and promise it would be made good after the war. Indeed, in 1783 the soldiers and officers were given land grants to cover the wages they had earned but had not been paid during the war. Not until 1781, when Robert Morris was named Superintendent of Finance of the United States, did the national government have a strong leader in financial matters. Morris used a French loan in 1782 to set up the private Bank of North America to finance the war. Seeking greater efficiency, Morris reduced the civil list, saved money by using competitive bidding for contracts, tightened accounting procedures, and demanded the federal government's full share of money and supplies from the states.[23]

Congress used four main methods to cover the cost of the war, which cost about 66 million dollars in specie (gold and silver).[24] Congress made two issues of paper money, in 1775–1780, and in 1780–81. The first issue amounted to 242 million dollars. This paper money would supposedly be redeemed for state taxes, but the holders were eventually paid off in 1791 at the rate of one cent on the dollar. By 1780, the paper money was "not worth a Continental", as people said, and a second issue of new currency was attempted. The second issue quickly became nearly worthless—but it was redeemed by the new federal government in 1791 at 100 cents on the dollar. At the same time the states, especially Virginia and the Carolinas, issued over 200 million dollars of their own currency. In effect, the paper money was a hidden tax on the people, and indeed was the only method of taxation that was possible at the time. The skyrocketing inflation was a hardship on the few people who had fixed incomes—but 90 percent of the people were farmers, and were not directly affected by that inflation. Debtors benefited by paying off their debts with depreciated paper.[25] The greatest burden was borne by the soldiers of the Continental Army, whose wages—usually in arrears—declined in value every month, weakening their morale and adding to the hardships suffered by their families.

Starting in 1776, the Congress sought to raise money by loans from wealthy individuals, promising to redeem the bonds after the war. The bonds were in fact redeemed in 1791 at face value, but the scheme raised little money because Americans had little specie, and many of the rich merchants were supporters of the Crown. Starting in 1776, the French secretly supplied the Americans with money, gunpowder and munitions in order to weaken its arch enemy, Great Britain. When France officially entered the war in 1778, the subsidies continued, and the French government, as well as bankers in Paris and Amsterdam loaned large sums to the American war effort. These loans were repaid in full in the 1790s.[26]

Beginning in 1777, Congress repeatedly asked the states to provide money. But the states had no system of taxation either, and were little help. By 1780 Congress was making requisitions for specific supplies of corn, beef, pork and other necessities—an inefficient system that kept the army barely alive.[27][28]

The New Nation[edit]

Chart 1: trends in economic growth, 1700–1850

The U.S. Constitution, adopted in 1787, established that the entire nation was a unified, or common market, with no internal tariffs or taxes on interstate commerce. The extent of federal power was much debated, with Alexander Hamilton taking a very broad view as the first secretary of the treasury during the presidential administration of George Washington. Hamilton successfully argued for the concept of "implied powers", whereby the federal government was authorized by the Constitution to create anything necessary to support its contents, even if it not specifically noted in it (build lighthouses, etc.). He succeeded in building strong national credit based on taking over the state debts and bundling them with the old national debt into new securities sold to the wealthy. They in turn now had an interest in keeping the new government solvent. Hamilton funded the debt with tariffs on imported goods and a highly controversial tax on whiskey. Hamilton believed the United States should pursue economic growth through diversified shipping, manufacturing, and banking. He sought and achieved Congressional authority to create the First Bank of the United States in 1791; the charter lasted until 1811.[29]

Industry and commerce[edit]


There were very few roads outside of cities and no canals in the new nation. In 1792 it was reported that the cost of transport of many crops to seaport was from one-fifth to one half their cost. Others were shut off because of the high cost of transport.[30]

Automatic flour mill[edit]

In the mid 1780s Oliver Evans invented a fully automatic mill that could process grain with practically no human labor or operator attention. This was a revolutionary development in two ways: 1) it used bucket elevators and conveyor belts, which would eventually revolutionize materials handling, and 2) it used governors, a forerunner of modern automation, for control.

Cotton gin[edit]

"The First Cotton Gin" conjectural image from 1869

Cotton, at first a small-scale crop in the South, boomed following Eli Whitney's invention in 1793 of the cotton gin, a machine that separated raw cotton from seeds and other waste. The cotton gin (abbreviation of engine) increased the productivity of separating seed from fiber by a factor of 50, enabling a man to de-seed as much cotton in a day as a woman could do in two months, at the rate of one pound per day. Soon, large plantations, based on slave labor, expanded in the richest lands from the Carolinas westward to Texas. The raw cotton was shipped to textile mills in Britain, France and New England.[31]

Mechanized textile manufacturing[edit]

In the final decade of the 18th century England was beginning to enter the rapid growth period of the Industrial Revolution, but the rest of the world was completely devoid of any type of large scale mechanized industry. Britain prohibited the export of textile machinery and designs and did not allow mechanics with such skills to emigrate.

Samuel Slater (1768–1835) popularly called "The Father of the American Industrial Revolution"

Samuel Slater, who worked as mechanic at a cotton spinning operation in England, memorized the design of the machinery. He was able to disguise himself as a laborer and emigrated to the U.S., where he heard there was a demand for his knowledge. In 1789 Slater began working as a consultant to Almy & Brown in Rhode Island who were trying to successfully spin cotton on some equipment they had recently purchased. Slater determined that the machinery was not capable of producing good quality yarn and persuaded the owners to have him design new machinery. Slater found no mechanics in the U.S. when he arrived and had great difficulty finding someone to build the machinery.[32] Eventually he located Oziel Wilkinson and his son David to produce iron castings and forgings for the machinery. According to David Wilkinson: “all the turning of the iron for the cotton machinery built by Mr. Slater was done with hand chisels or tools in lathes turned by cranks with hand power”. By 1791 Slater had some of the equipment operating. In 1793 Slater and Brown opened a factory in Pawtucket, Rhode Island, which was the first successful water powered roller spinning cotton factory in the U.S. See: Slater Mill Historic Site David Wilkinson went on to invent a metalworking lathe which won him a Congressional prize.

The early 19th century[edit]

Agriculture, commerce and industry[edit]

Labor shortage[edit]

The U.S. economy of the 19th century was characterized by labor shortages, as noted by numerous contemporary observers. The labor shortage was attributed to the cheapness of land and the high returns on agriculture. All types of labor were in high demand, especially unskilled labor and experienced factory workers. Labor prices in the U.S. were typically from 30-50% higher than in Britain. Women factory workers were especially scarce. The elasticity of labor was low in part because of lack of transportation and low population density. The relative labor scarcity and high price was an incentive for capital investment, particularly in machinery.[33]


The U.S. economy was primarily agricultural in the early 19th century. Westward expansion plus the building of canals and the introduction of steamboats opened up new areas for agriculture. Much land was cleared and put into growing cotton in the Mississippi valley and in Alabama, and new grain growing areas were brought into production in the Mid West. Eventually this put severe downward pressure on prices, particularly of cotton, first from 1820–23 and again from 1840-43. The cotton trade, excluding financing, transport and marketing, was 6% or less of national income in the 1830s.[34]

Sugar cane was being grown in Louisiana, where it was refined into granular sugar. Growing and refining sugar required a large amount of capital. Some of the nation's wealthiest people owned sugar plantations, which often had their own sugar mills.


There were only a few roads outside of cities at the beginning of the 19th century, but turnpikes were being built. A ton-mile by wagon cost from between 30 and 70 cents in 1819. Robert Fulton's estimate for typical wagonage was 32 cents per ton-mile. The cost of transporting wheat or corn to Philadelphia exceeded the value at 218 and 135 miles, respectively.[35]

To facilitate westward expansion, in 1801 Thomas Jefferson began work on the Natchez Trace, which was to connect Daniel Boone's Wilderness Road, which ended in Nashville, Tennessee, with the Mississippi River.

Following the Louisiana Purchase the need for additional roads to the West were recognized by Thomas Jefferson, who authorized the construction of the Cumberland Road in 1806. The Cumberland Road was to connect Cumberland Maryland on the Potomac River with the Wheeling (West) Virginia on the Ohio River, which was on the other side of the Alleghany Mountains. Mail roads were also built to New Orleans.

The building of roads in the early years of the 19th century greatly lowered transportation cost and was a factor in the deflation of 1819-21, which was one of the most severe in U. S. history.[35]

Some turnpikes were wooden plank roads, which typically cost about $1,500 to $1800 per mile, but wore out quickly. Macadam roads in New York cost an average of $3,500 per mile,[36] while high quality roads cost between $5,000 and $10,000 per mile.


Scene of Lockport on the Erie Canal (W. H. Bartlett 1839)

Because a horse can pull a barge weighing 50 tons compared to the typical one ton or less hauled by wagon, and the horse required a wagoner versus a couple of men for the barge, water transportation costs were a small fraction of wagonage costs. Canals shipping cost were between two and three cents per ton mile, compared to over 30 cents by wagon.[8] The cost of constructing a typical canal was between $20,000 and $30,000.[37]

Only 100 miles of canals had been built in the U.S. by 1816, and only a few were longer than two miles. The early canals were typically financially successful, such as those carrying coal in eastern Pennsylvania.

The 325 mile Erie Canal, which connected Albany, New York on the Hudson River with Buffalo, New York on Lake Erie, began operation in 1825. Cost per ton-mile from Buffalo to New York City was in 1817 was 19.2 cents. By Erie Canal ca. 1857-60 the cost was 0.81 cents.[38] The Erie Canal was a great commercial success and had a had a large regional economic impact.

The Delaware and Raritan Canal was also very successful. Also tremendously successful was the 2.5 mile canal bypassing the falls on the Ohio River at Louisville, which opened in 1830.[39]

The success of some of the early canals led to canal building boom, during which work began on many canals which would prove to be financially unsuccessful. As the canal boom was underway in the late 1820s, a small number of horse railways were being built. These were quickly followed by the first steam railways in the 1830s.

Steam power[edit]

In 1780 the U.S. had three major steam engines, all of which were used for pumping water: two in mines and one for New York City's water supply. Most power in the United States was supplied by water wheels (and water turbines during after 1840). By 1807 when the steamboat Clermont first sailed, there were estimated to be fewer than a dozen steam engines operating in the U. S. Steam power did not overtake water power in the U. S. until sometime after 1850.[40]

Oliver Evans began developing a high pressure steam engine that was more practical than the engine developed around the same time by Richard Trevithick in England. The high pressure engine did away with the separate condenser (invented by James Watt) and thus did not require cooling water. It also had a higher power to weight ratio, making it suitable for powering steamboats and locomotives. Evans produced a few custom steam engines from 1801 to 1806, when he opened the Mars Works foundry and factory near Philadelphia, where he produced additional engines. In 1812 he produced his successful Colombian engine at Mars. As his business grew and orders were being shipped inland, Evans and a partner formed the Pittsburgh Steam Engine Company in Pittsburgh, Pennsylvania. Steam engines soon became common in public water supply, sawmills and flour milling, especially in areas where there was no water power.

Mechanical power transmission[edit]

In 1828 Paul Mody substituted leather belting for gearing in mills. Leather belting continued in use until it was displaced by unit drive electric motors in the early decades of the 20th century.[41]

Steamboats and steam ships[edit]

Commercial steamboat operations began in 1807 within weeks of the launch of Robert Fulton's North River Steamboat, often referred to as the Clermont.

The first steamboats were powered by Boulton and Watt type low pressure engines, which were very large and heavy in relation to the smaller high pressure engines. In 1807-8 Robert L. Stevens began operation of the Phoenix, which used a high pressure engine in combination with a low pressure condensing engine. The first steamboats powered only by high pressure were the Aetna and Pennsylvania designed and built by Oliver Evans.[42]

In the winter of 1811-1812, the New Orleans became the first steamboat to travel down the Ohio and Mississippi Rivers from Pittsburgh to New Orleans.

By the time of Fulton's death in 1815 he operated 21 of the estimated 30 steamboats in the U.S. The number of steamboats steadily grew into the hundreds. There were more steamboats in the Mississippi valley than anywhere else in the world.[43]

Early steamboats took 30 days to travel from New Orleans to Louisville, which was from half to one-quarter the time by keel boat. Due to improvements in steamboat technology, by 1830 the time from New Orleans to Louisville was halved. In 1820 freight rates for keel boats were 5 cents versus 2 cents by steamboat, falling to one-half cent per pound by 1830.[44]

The SS Savannah crossed from Savannah to Liverpool in 1919 as the first trans-Atlantic steamship; however, until the development of more efficient engines, trans-ocean ships had to carry more coal than freight. Early trans-ocean steamships were used for passengers and soon some companies began offering regularly scheduled service.


Horse railways began being built early in the 19th century, but in the 1830s steam locomotive technology had evolved to the point they were viable.

The steam railways of the 1830s mostly connected east coast cities or connected to navigable waterways and primarily handled freight rather than passengers.[45]

A typical mile of railroad cost $30,000 compared to the $20,000 per mile of canal, but a railroad could carry 50 times as much traffic. Railroads appeared at the time of the canal boom when several canals were under construction, causing many completed and construction stage canals to fail.

The first locomotives were imported from England. One such locomotive was the John Bull which arrived in 1831. While awaiting assembly, Matthias W. Baldwin, who had designed and manufactured a highly successful stationary steam engine, was able to inspect the parts and obtain measurements. Baldwin was already working on an experimental locomotive based on designs shown at the Rainhill Trials in England. Baldwin produced his first locomotive in 1832, but it performed poorly, although it was subsequently improved. Baldwin went on to found the Baldwin Locomotive Works, one of the largest steam locomotive manufacturers.

In 1833 when there were few locomotives in the U.S., three quarters were made in England. In 1838 there were 346 locomotives recorded in the U.S., three fourths of which were made in the U.S.[46]

Ohio had more railroads built in the 1840s than any other state. Ohio’s railroads put the canals out of business.[47]


The U. S. textile industry was able to become established during the long period of wars from 1793 to 1815, when trade with Europe was either difficult or prohibited, as in the case of the Embargo Act of 1807, which lasted from December 1807 to March 1809. The embargo was responsible for an increase in capital investment in machinery[48] and helped the establishment of mechanical trades in the U.S.

Boston Manufacturing Co., Waltham, Massachusetts

By the time of the Embargo Act of 1807 there here were 15 cotton spinning mills in operation in the U. S. These were all small operations, typically employing fewer than 50 people, and most used Arckwright water frames powered by small streams. They were all located in southeastern New England.[49] In 1809 the number of mills had grown to 62, with 25 under construction. To meet increased demand for cloth several manufacturers resorted to the putting-out system of having the handloom weaving done in homes. The putting-out system was inefficient because of the difficulty of distributing the yarn and collecting the cloth, embezzlement of supplies, lack of supervision and poor quality. To overcome these problems the textile manufacturers began to consolidate work in central workshops shops where they could supervise operations. Taking this to the next level, in 1815 Francis Cabot Lowell of the Boston Manufacturing Company built the first integrated spinning and weaving factory in the world at Waltham, Massachusetts, using plans for a power loom that he smuggled out of England. This was the largest factory in the U.S., with a workforce of about 300. It was a very efficient, highly profitable mill that, with the aid of the Tariff of 1816, competed effectively with British textiles at a time when many smaller operations were being forced out of business.

The U.S. began exporting textiles in the 1830s. Cloth production became the major industry in the U.S.[48]

The shoe industry began transitioning from production by craftsmen to the factory system, with division of labor.[50]

Low return freight rates from Europe offered little protection from imports to domestic industries.[51]

Finance, money and banking[edit]

In order to dampen speculation in land, Andrew Jackson signed the executive order known as the Specie Circular in 1836, requiring sale of government land to be paid in gold and silver. Branch mints at New Orleans, Dahlonega, Georgia and Charlotte North Carolina were authorized by congress in 1835 and became operational in 1838.

The charter of the Second Bank of the United States expired in January 1836. Gold was being withdrawn from the U. S. by England and silver had also been taken out of the country because it had been under valued relative to gold by the Coinage Act of 1834. Canal projects began to fail. The result was the financial Panic of 1837. In 1838 there was a brief recovery.

The aftermath of the canal failures, the Panic of 1837 and the collapse in agricultural commodity prices, particularly cotton prices, were all factors in the depression that lasted from 1839-1943. The timing for cotton was made worse by the saturation of the cotton textile market at the ending stage of the Industrial Revolution in Britain. The depression was one of the most severe in the nation's history.[52] See: For additional information see Historical examples of credit deflation

Despite the deflation and depression, GDP rose 16% from 1839-43.[8]

Development of interchangeable parts[edit]

The experience of this War of 1812 led the War Department to issue a request for contract proposals for firearms with interchangeable parts. Previously, parts from one firearm had to be carefully hand-fitted to another firearm; almost all infantry regiments necessarily included an artificer or armorer who could perform this intricate gunsmithing. The requirement for interchangeable parts forced forward the development of modern metal-working machine tools, including milling machines, grinders, shapers and planers. The Federal Armories perfected the use of machine tools by developing fixtures to correctly position the parts being machined and jigs to guide the cutting tools over the proper path. Systems of blocks and gauges were also developed to check the accuracy and precision of the machined parts. Developing the manufacturing techniques for making interchangeable parts by the Federal Armories took over two decades. The machinists' skills were called armory practice and the system eventually became known as the American system of manufacturing. Machinists from the armories eventually spread the technology to other industries, such as clocks and watches, especially in the New England area.

The development of these modern machine tools and machining practices made possible the development of modern industry capable of mass production; however, large scale industrial production did not develop in the U.S. until the late 19th century.[53][54][55][56]

Political developments[edit]

The institutional arrangements of the American System were initially formulated by first Secretary of the Treasury, Alexander Hamilton, who proposed the creation of a government-sponsored bank and increased tariffs to encourage industrial development.[57] Following Hamilton's death at the hands of Aaron Burr, the American school of political economy was championed in the antebellum period by Henry Clay and the Whig Party (United States) generally.[58]

Thomas Jefferson was able to purchase the Louisiana Territory from France in 1803 for $15 million, although the treasury at the time only had $10 million. The Louisiana Purchase greatly expanded the size of the United States, adding extremely good farmland, the Mississippi River and the city of New Orleans.

Specific government programs and policies which gave shape and form to the American School and the American System include the establishment of the Patent Office in 1802; the creation of the Coast and Geodetic Survey in 1807 and other measures to improve river and harbor navigation; the various Army expeditions to the west, beginning with Lewis and Clark's Corps of Discovery in 1804 and continuing into the 1870s, almost always under the direction of an officer from the Army Corps of Topographical Engineers, and which provided crucial information for the overland pioneers that followed; the assignment of Army Engineer officers to assist or direct the surveying and construction of the early railroads and canals; the establishment of the First Bank of the United States and Second Bank of the United States as well as various protectionist measures (e.g., the tariff of 1828).

Thomas Jefferson and James Madison opposed a strong central government (and, consequently, most of Hamilton's economic policies), but they could not stop Hamilton, who wielded immense power and political clout in the Washington administration. In 1801, however, Jefferson became president and turned to promoting a more decentralized, agrarian democracy called Jeffersonian democracy. (He based his philosophy on protecting the common man from political and economic tyranny. He particularly praised small farmers as "the most valuable citizens".) However, Jefferson did not change Hamilton's basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20-year charter.[59]

Wars from 1793-1814 caused withdrawal of most foreign shipping from the U.S., leaving trade in the Caribbean and Central and South America open for the U.S. Seizure of U.S. ships by France and Britain during the Napoleonic Wars led to the Embargo Act of 1807 which prohibited most foreign trade.[60] The War of 1812, by cutting off almost all foreign trade, created a home market for goods made in the U.S. (even if they were more expensive), changing an early tendency toward free trade into a protectionism characterized by nationalism and protective tariffs.[61]

States built roads and waterways, such as the Cumberland Pike (1818) and the Erie Canal (1825), opening up markets for western farm products. The Whig Party supported Clay's American System, which proposed to build internal improvements (e.g. roads, canals and harbors), protect industry, and create a strong national bank. The Whig legislation program was blocked at the national level by the Democrats, but similar modernization programs were enacted in most states on a bipartisan basis.[62]

President Andrew Jackson (1829–1837), leader of the new Democratic Party, opposed the Second Bank of the United States, which he believed favored the entrenched interests of rich. When he was elected for a second term, Jackson blocked the renewal of the bank's charter. Jackson opposed paper money and demanded the government be paid in gold and silver coins. The Panic of 1837 stopped business growth for three years.[63]

The mid 19th century[edit]

Commerce, industry and agriculture[edit]

The depression that began in 1839 ended with an upswing in economic activity in 1843.

Table 1: Sector shares
Employment %Output % (1860 prices)
Source: Joel Mokyr[64]


Railroads opened up remote areas and drastically cut the cost of moving freight and passengers. By 1860 long distance bulk rates had fallen by 95%, less than of which was due to the general fall in prices.[65] This large fall in transportation costs created "a major revolution in domestic commerce."[66]

As transportation improved, new markets continuously opened. Railroads greatly increased the importance of hub cities such as Atlanta, Billings, Chicago, and Dallas.[67]

Railroads were a highly capital intensive business, with a typical cost of $30,000 per mile with a considerable range depending on terrain and other factors.[43] Private capital for Railroads during the period from 1830-60 was inadequate. States awarded charters, funding, tax breaks, land grants, and provided some financing. Railroads were allowed banking privileges and lotteries in some states. Private investors provided a small but not insignificant share or railroad capital.[68] A combination of domestic and foreign investment along with the discovery of gold and a major commitment of America's public and private wealth, enabled the nation to develop a large-scale railroad system, establishing the base for the country's industrialization.

Table 2: Railroad Mileage Increase by Groups of States
New England2,5073,6604,4945,9826,831
Middle States3,2026,70510,96415,87221,536
Southern States2,0368,83811,19214,77829,209
Western States and Territories1,27611,40024,58752,58962,394
Pacific States and Territories231,6774,0809,804
TOTAL NEW TRACK USA9,02130,62652,91493,301129,774
Source: Chauncey M. Depew (ed.), One Hundred Years of American Commerce 1795–1895 p 111
1864, Pennsylvania oil drilling early in the history of the petroleum industry in the United States

Railroad executives invented modern methods for running large-scale business operations, creating a blueprint that all large corporations basically followed. They created career tracks that took 18-year-old boys and turned them into brakemen, conductors and engineers.[69] They were first to encounter managerial complexities, labor union issues, and problems of geographical competition. Due to these radical innovations, the railroad became the first large-scale business enterprise and the model for most large corporations.[70]

1900 panoramic image of the Chicago slaughter houses

Iron industry[edit]

The most important technological innovation in mid 19th century pig iron production was the adoption of hot blast, which was developed and patented in Scotland in 1828. Hot blast is a method of using heat from the blast furnace exhaust gas to preheat combustion air, saving a considerable amount of fuel. It allowed much higher furnace temperatures and increased the capacity of furnaces.

Hot blast allowed blast furnaces to use anthracite or lower grade coal. Anthracite was difficult to light with cold blast. High quality metallurgical coking coal deposits of sufficient size for iron making were only available in Great Britain and western Germany in the 19th century,[71] but with less fuel required per unit of iron, there were proportionately fewer contaminants.

The use of anthracite was rather short lived because the size of blast furnaces increased enormously toward the end of the century, forcing the use of coke, which was more porous and did not impede the upflow of the gases through the furnace. Charcoal would have been crushed by the column of material in tall furnaces. Also, the capacity of furnaces would have eventually exceeded the wood supply, as happened with locomotives.[72]

Charcoal production was very labor and land intensive. It was estimated that to fuel a typical sized 100 ton of pig iron per weed furnace in 1833 at a sustained yield, timber plantations required 20,000 acres. The trees had to be hauled by oxen to where they were cut, stacked on end and covered with earth or put in a kiln to be charred for about a week. Anthracite reduced labor cost to $2.50 per ton compared to charcoal at $15.50 per ton.[73][74]

Iron was used for a wide variety of purposes. In 1860 large consumers were numerous types of castings, especially stoves. Of the $32 million of bar, sheet and railroad iron produced, slightly less than half was railroad iron. The value added by stoves was equal to the value added by rails.[48]


Manufacturing became well established during the mid 19th century. Labor in the U.S. was expensive and industry made every effort to economize by using machinery.[53] Woodworking machinery such as circular saws, high speed lathes, planers and mortising machines and various other machines amazed the British as was reported by Joseph Whitworth.[75] See: American system of manufacturing#Use of machinery

In the early 19th century machinery was made mostly of wood with iron parts. By the mid century machines were being increasingly of all iron, which made allowed them to operate at higher speeds and with higher precision. The demand for machinery created a machine tool industry that designed and manufactured lathes, metal planers, shapers and other precision metal cutting tools.[76]

The shoe industry was the second to be mechanized, beginning in the 1840s. Sewing machines were developed for sewing leather. A leather rolling machine eliminated hand hammering, and was thirty times faster. Blanchard lathes began being used for making shoe lasts (forms) in the 1850s, allowing the manufacture of standard sizes.[50]

By the 1850s much progress had been made in the development of the sewing machine, with a few companies making the machines, based on a number of patents, with no company controlling the right combination of patents to make a superior machine. To prevent damaging lawsuits, in 1856 several important patents were pooled under the Sewing Machine Combination, which licensed the patents for a fixed fee per machine sold.

The sewing machine industry was a beneficiary of machine tools and the manufacturing methods developed at the Federal Armories. By 1860 two sewing machine manufacturers were using interchangeable parts.[53]

The sewing machine increased the productivity of sewing cloth by a factor of 5.

Steam power[edit]

The Corliss steam engine, patented in 1848, was called the most significant development in steam engineering since James Watt. The Corliss engine was more efficient than previous engines and maintained more uniform speed in response to load changes, making it suitable for a wide variety of industrial applications. It was the first steam engine that was suitable for cotton spinning.

Steam power greatly expanded during the late 19th century with the rise of large factories, the expanded railroad network and early electric lighting and electric street railways.


Until the introduction of iron ships, the U. S. made the best in the world. The design of U.S. ships required fewer crew members to operate. U.S. made ships cost from 40% to 60% as much as European ships, and lasted longer.[77]

The screw propeller was tested on Lake Ontario in 1841 before being used on ocean ships.[78] Propellers began being used on Great Lakes ships in 1845.[79] Propellers caused vibrations which were a problem for wooden ships.[80] The SS Great Britain, launched in 1845, was the first iron ship with a screw propeller. Iron ships became common and more efficient multiple expansion engines were developed. After the introduction of iron ships, Britain became the leading shipbuilding country.


Congress approved funds for a short demonstration telegraph line from Baltimore to Washington D.C., which was operational in 1844. The telegraph was quickly adopted by the railroad industry, which needed rapid communication to coordinate train schedules, the importance of which had been highlighted by a train collision in 1841. Railroads also needed to communicate over over a vast network in order to keep track of freight and equipment.[81] Consequently, railroads installed telegraphs lines on their existing right of ways. By 1852 there were 22,000 miles of telegraph lines in the U.S.,compared to 10,000 miles of track.[82]


By 1860, on the eve of Civil War, 16% of the people lived in cities with 2500 or more people and one third of the nation's income came from manufacturing. Urbanized industry was limited primarily to the Northeast; cotton cloth production was the leading industry, with the manufacture of shoes, woolen clothing, and machinery also expanding. Most of the workers in the new factories were immigrants or their children. Between 1845 and 1855, some 300,000 European immigrants arrived annually. Many remained in eastern cities, especially mill towns and mining camps, while those with farm experience and some savings bought farms in the West.[83]


Threshing machine from 1881. Steam engines were also used instead of horses.
Adriance reaper, late 19th century

The westward expansion into the highly productive heartland was timely for supporting the rapidly growing domestic population and to capitalize on high grain prices caused by poor harvests in Europe during the time of the Great Famine in Ireland[60] Grain prices also rose during the Crimean War.

Agriculture was the largest single industry and it prospered during the war.[84][85] Prices were high, pulled up by a strong demand from the army and from Britain, which depended on American wheat for a fourth of its food imports.

John Deere developed a cast steel plow in 1837 which was lightweight and had a moldboard that efficiently turned over and shed the plowed earth. It was easy for a horse to pull and was well suited to cutting the thick prairie sod of the Midwest. He and his brother Charles founded Deere and Company which continues into the 21st century as the largest maker of tractors, combines, harvesters and other farm implements.[86][87]

Threshing machines, which were a novelty at the end of the 18th century, began being widely introduced in the 1830s and 1840s. Mechanized threshing required less than half the labor of hand threshing.[88][89]

The war acted as a catalyst that encouraged the rapid adoption of horse-drawn machinery and other implements. The rapid spread of recent inventions such as the reaper and mower made the work force efficient, even as hundreds of thousands of farmers were in the army.[90] Many wives took their place, and often consulted by mail on what to do; increasingly they relied on community and extended kin for advice and help.[91]

The 1862 Homestead Act opened up the public domain lands for free. Land grants to the railroads meant they could sell tracts for family farms (80 to 200 acres) at low prices with extended credit. In addition the government sponsored fresh information, scientific methods and the latest techniques through the newly established Department of Agriculture and the Morrill Land Grant College Act.[92]

Collapse of South[edit]

The wartime devastation of the South was great and poverty ensued; incomes of whites dropped, but income of the former slaves rose. During Reconstruction railroad construction was heavily subsidized (with much corruption), but the region maintained its dependence on cotton. Former slaves became wage laborers, tenant farmers, or sharecroppers. They were joined by many poor whites, as the population grew faster than the economy. As late as 1940 the only significant manufacturing industries were textile mills (mostly in the upland Carolinas) and some steel in Alabama.[93]

The industrial advantages of the North over the South helped secure a Northern victory in the American Civil War (1861–1865). The Northern victory sealed the destiny of the nation and its economic system. The slave-labor system was abolished; the world price of cotton plunged, making the large southern cotton plantations much less profitable. Northern industry, which had expanded rapidly before and during the war, surged ahead. Industrialists came to dominate many aspects of the nation's life, including social and political affairs.[83]

Political developments[edit]

From the 1830s to 1860, Congress repeatedly rejected Whig calls for higher tariffs, and its policies of Economic nationalism, which included increased state control, regulation and macroeconomic development of infrastructure.[94] President Andrew Jackson, for example, destroyed the Second Bank of the United States. The tariff was lowered time and again before the Civil War. Proposals to fund massive western railroad projects, or to give free land to homesteaders, were defeated by Southerners afraid these policies would strengthen the North. The Civil War changed everything.


In 1860 the Treasury was a small operation that funded the small-scale operations of the government through the low tariff and land sales.[95] Revenues were trivial in comparison with the cost of a full-scale war, but the Treasury Department under Secretary Salmon P. Chase showed unusual ingenuity in financing the war without crippling the economy.[96] Many new taxes were imposed, and always with a patriotic theme comparing the financial sacrifice to the sacrifices of life and limb. The government paid for supplies in real money, which encouraged people to sell to the government regardless of their politics. By contrast the Confederacy gave paper promissory notes when it seized property, so that even loyal Confederates would hide their horses and mules rather than sell them for dubious paper. Overall the Northern financial system was highly successful in raising money and turning patriotism into profit, while the Confederate system impoverished its patriots.[97]

The United States needed $3.1 billion to pay for the immense armies and fleets raised to fight the Civil War — over $400 million just in 1862.[98] The largest tax sum by far came from new excise taxes—a sort of value added tax—that was imposed on every sort of manufactured item. Second came much higher tariffs, through several Morrill tariff laws. Third came the nation's first income tax; only the wealthy paid and it was repealed at war's end.

Apart from taxes, the second major source was government bonds. For the first time bonds in small denominations were sold directly to the people, with publicity and patriotism as key factors, as designed by banker Jay Cooke. State banks lost their power to issue banknotes. Only national banks could do that, and Chase made it easy to become a national bank; it involved buying and holding federal bonds and financiers rushed to open these banks. Chase numbered them, so that the first one in each city was the "First National Bank".[99] Fourth the government printed "greenbacks"—paper money—which were controversial because they caused inflation.

Secretary Chase, though a long-time free-trader, worked with Congressman Justin Morrill to pass a second tariff bill in summer 1861, raising rates another 10 points in order to generate more revenues.[100] These subsequent bills were primarily revenue driven to meet the war's needs, though they enjoyed the support of protectionists such as Carey, who again assisted Morrill in the bill's drafting. The Morrill Tariff of 1861 was designed to raise revenue. The tariff act of 1862 served not only to raise revenue, but also to encourage the establishment of factories free from British competition by taxing British imports. Furthermore, it protected American factory workers from low paid European workers, and as a major bonus attracted tens of thousands of those Europeans to immigrate to America for high wage factory and craftsman jobs.[101]

Land grants[edit]

Homesteaders in central Nebraska in 1886

The U.S. government owned vast amounts of good land (mostly from the Louisiana Purchase of 1803 and the Oregon Treaty with Britain in 1846). The challenge was to make the land useful to people and to provide the economic basis for the wealth that would pay off the war debt. Land grants went to railroad construction companies to open up the western plains and link up to California. Together with the free lands provided farmers by the Homestead Law the low-cost farm lands provided by the land grants speeded up the expansion of commercial agriculture. The North's most important war measure was perhaps the creation of a system of national banks that provided a sound currency for the industrial expansion. Even more important, the hundreds of new banks that were allowed to open were required to purchase government bonds. Thereby the nation monetized the potential wealth represented by farms, urban buildings, factories, and businesses, and immediately turned that money over to the Treasury for war needs.

Civil War[edit]

The Union grew rich fighting the war, as the Confederate economy was destroyed.[102] The Republicans in control in Washington had a Whig vision of an industrial nation, with great cities, efficient factories, productive farms, national banks, and high-speed rail links. The South had resisted policies such as tariffs to promote industry and homestead laws to promote farming because slavery would not benefit; with the South gone, and Northern Democrats very weak in Congress, the Republicans enacted their legislation. At the same time they passed new taxes to pay for part of the war, and issued large amounts of bonds to pay for the most of the rest. (The remainder can be charged to inflation.) They wrote an elaborate program of economic modernization that had the dual purpose of winning the war and permanently transforming the economy. The key policy-maker in Congress was Thaddeus Stevens, as chairman of the Ways and Means Committee. He took charge of major legislation that funded the war effort and revolutionized the nation's economic policies regarding tariffs, bonds, income and excise taxes, national banks, suppression of money issued by state banks, greenback currency, and western railroad land grants.[103]

Historians have debated whether or not the Civil War sped up the rate of economic growth in the face of destruction throughout the South and the diversion of resources to military supplies and away from civilian goods. In any case the war taught new organizational methods, prioritized engineering skills, and shifted the national attention from politics to business.[104]

Late 19th century[edit]

Commerce, industry and agriculture[edit]

See also: Gilded Age

The greatly expanded railroad network with using newly developed steel rails dramatically lowered transportation cost to areas without access to navigable waterways. Low freight rates allowed large manufacturing facilities with great economies of scale. Machinery became a large industry and many types of machines were developed. Businesses were able to operate over wide areas and chain stores arose. Mail order companies started operating.

An explosion of new discoveries and inventions took place, a process called the "Second Industrial Revolution". The electric light, telephone, steam turbine, internal combustion engine, automobile, phonograph, typewriter and tabulating machine were some of the many inventions of the period. New processes for making steel and chemicals such as dyes and explosives were invented. The pneumatic tire, improved ball bearings, machine tools and newly developed metal stamping techniques enabled the large scale production of bicycles in the 1890s.

One of the most significant developments was the widespread introduction of electric street railways (trams, trolleys or streetcars) in the 1890s.

By 1890, the USA leaped ahead of Britain for first place in manufacturing output.[105]

Table 3: Ten leading U.S. industries by value added (millions of 1914 $'s)
IndustryValue addedIndustryValue addedIndustryValue addedIndustryValue added
Cotton goods59Machinery111Machinery432Machinery576
Lumber54Iron and steel105Iron and steel339Iron and steel493
Boots and shoes53Cotton goods97Printing and publishing313Lumber393
Flour and meal43Lumber87Lumber300Cotton goods364
Men's clothing39Boots and shoes82Clothing262Shipbuilding349
Machinery31Men's clothing78Liquor224Automotive347
Woolen goods27Flour and meal64Cotton goods196General shop construction328
Leather goods24Woolen goods60Masonry and brick140Printing and publishing268
Cast iron23Printing58General shop construction131Electrical machinery246
Source: Joel Mokyr[64]
Steel workers in 1905, Meadville, Philadelphia


Real gross national product per capita of the United States 1869–1918
Pork packing in Cincinnati, 1873

Railroads saw their greatest growth in new track added in the last three decades of the 19th century. (See Table 2) Railroads also enjoyed high productivity growth during this time, mainly because of the introduction of new processes that made steel inexpensive. Steel rails lasted roughly ten times longer than iron rails. Steel rails, becoming heavier as steel prices fell, enabled heavier, more powerful locomotives that could pull longer trains. Rail cars made of steel could be made longer cars and had a load carrying to car weight ratio of 2:1 compared to cars made of iron at 1:1.[106]

In 1890 David Ames Wells estimated wagon transport at 16 cents per ton-mile compared to railroads at less than one cent per ton-mile.[107]

Railroads competed fiercely for passengers and freight by expanding their routes, too often into increasingly marginal ones. The high capital required for expansion plus the low rates, driven by competition and by what the market would bear, resulted in a large percentage of railroad track in bankruptcy.

A practical refrigerated (ice cooled) railcar was introduced in 1881. This made it possible to ship cattle and hog carcasses, which weighed only 40% as much as live animals. Gustavus Franklin Swift developed an integrated network of cattle procurement, slaughtering, meat-packing and shipping meat to market. Up to that time cattle were driven great distances to railroad shipping points, causing the cattle to loose considerable weight. Swift developed a large business, which grew in size with the entry of several competitors.


The Bessemer process was the first large scale process for producing steel, which it was able to do at reasonable cost. Due to difficulty in controlling the quality, Bessemer steel was most suited to making rails.

The Siemens-Martin process using an open hearth furnace produced a suitable grade structural steel. Open hearth steel displaced wrought iron as a structural material in the 1880s.

Electric lights and electric street railways[edit]

Early electrification was too limited to have a big impact on the late 19th century economy. Electricity was also very expensive because of the low conversion efficiency of fuel to power, the small scale of power plants and the fact that most utilities offered only night time service. Day time service became common during the early 20th century after the introduction of the AC motor, which tended to be used more during the day, balancing the load. Until that time a large share of power was self-generated by the user, such as a factory, hotel or electric street railway (tram or streetcar).[108]

Electric street railways were introduced in the U.S. in 1888 when Frank Frank J. Sprague designed and built the first practical system in the in, the Richmond Union Passenger Railway in Richmond, Virginia. Electric street railways rapidly spread to cities around the country in the following years.

The early electric street railways typically generated their own power and also operated as electric utilities, which served to even out daily load because the main use of power for lighting was after the peak usage by railways.

Until the early 1880s electricity had been used in telegraphy and electroplating. Efficient dynamo's were introduced in the 1870s and began being used to power electric carbon arc lamps after 1879. In 1880 Thomas Edison patented his invention of a long lasting incandescent light bulb and a system for distributing electrical power. In 1882 he opened the Pearl Street Station in Manhattan, which was the first central power station in the U.S.

Using DC placed severe restrictions on the distance power could be transmitted due to power losses. With DC there was no way to transform power to high voltages. Power can be safely generated to about 2000 volts, but this is a dangerous voltage for household use. With alternating current voltage can be changed up or down using a transformer. AC power began being widely introduced in the 1890s.


Following the failure of the first short lived Transatlantic telegraph cable of 1858, a second, more durable cable was completed in 1865, connecting Nova Scotia to England. By 1890 there was an international telegraph network.[107] After invention of the telephone in 1776 additional development work was required to make it commercially viable. The first telephones were for local calls.[81] Long distance calling came into being in the 1890s, but the technology to make transcontinental calls took until 1915 to be operational.[109]


South American guano and sodium nitrate began being imported in large quantities.

Sales of various types of horse pulled harvesting machines increased dramatically between the Civil war and the end of the century.[53] Harvesting machine improvements included automatic rakers, which eliminated the manual raker, allowing operation by a single man, and combination harvester and binders.[90]

To modernize traditional agriculture reformers founded the Grange movement, in 1867. Federal land grants helped each state create an agricultural college and a network of extension agents who demonstrated modern techniques to farmers. Wheat and cotton farmers in the 1890s supported the Populist movement, but failed in their demands for free silver and inflation. Instead the 1896 election committed the nation to the gold standard and a program of sustained industrialization.

Minerals and mining[edit]

Parallel to these achievements was the development of the nation's industrial infrastructure. Coal was found in abundance in the Appalachian Mountains from Pennsylvania south to Kentucky. Oil was discovered in western Pennsylvania; it was mainly used for lubricants and for kerosene for lamps. Large iron ore mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where these coal and iron ore could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories.[110]

Finance, money and banking[edit]

During the period, a series of recessions happened. Panic of 1873 had New York Stock Exchange closed for ten days, of the country's 364 railroads, 89 went bankrupt, a total of 18,000 businesses failed between 1873 and 1875, unemployment reached 14% by 1876, during a time which became known as the Long Depression. The end of the Gilded Age coincided with the Panic of 1893, a deep depression that lasted until 1897 and marked a major political realignment in the election of 1896.

Labor unions[edit]

Workers in New York in 1871 demand the eight-hour day

The American labor movement began with the first significant labor union, the Knights of Labor in 1869. The Knights collapsed in the 1880s and were displaced by strong international unions that banded together as the American Federation of Labor under Samuel Gompers. Rejecting socialism, the AFL unions negotiated with owners for higher wages and better working conditions. Union growth was slow until 1900, then grew to a peak during World War I.[111]

Early 20th century[edit]

Industry, commerce and agriculture[edit]

Two of the most transformative technologies of the century were widely introduced during the early part of the century: electrification, powered by high pressure boilers and steam turbines and automobiles and trucks powered by the internal combustion engine.


Main article: Electrification

Electrification had a major impact on the early 20th century economy. The revolutionary design of electric powered factories caused the period of the highest productivity growth in manufacturing. There was large growth in the electric utility industry and the productivity growth of electric utilities was high as well.

Electrification in the U.S. started in industry c. 1900, and by 1930 about 80% of power used in industry was electric. Electric utilities with central generating stations using steam turbines greatly lowered the cost of power, with businesses and houses in cities becoming electrified.

Electric street railways[edit]

Electric street railways developed into a major mode of transportation, and electric inter-urban service connected many cities in the Northeast and Midwest. Electric street railways also carried freight, which was important before trucks became widely introduced.


Electrochemicals are chemicals and metals produced by an electrolytic process. Important examples include aluminum made by the Hall–Héroult process and chlorine and caustic (sodium and potassium compounds). Chlorine and caustic had been produced by chemical processes but producing aluminum this way was prohibitively expensive. A large plant using Hall–Héroult process was opened in Pittsburgh, USA in 1888 and others opened around the world. Falling electricity prices in the early 20th century greatly lowered the cost of making electrochemicals. There was high demand for aluminum for aircraft during World War I and afterward for commercial aviation.

Some other electrochemicals are chromium, manganese and tungsten.


At the beginning of the 20th century the railroad network had over expanded with many miles of unprofitable routes. In 1906 Congress gave the Interstate Commerce Commission the power to regulate freight rates and the industry was unable to increase revenue enough to cover rising costs. By 1916, the peak year of track mileage, one-sixth of the nations railroad trackage was in bankruptcy.

The railroads proved inadequate to the increased freight volume created by World War I. There were major traffic jams in the system and critical supplies were experiencing delays. In December 1917 he railroads were taken over by the government and put under control of the United States Railroad Administration (USRA). The USRA ordered 1,930 new standardized and over 100,000 railcars. The USRA's control over the railroads ended in March 1920.

Automobiles and trucks[edit]

By the dawn of the 20th century, automobiles had begun to replace horse-drawn carriages.[112] Numerous companies were building cars, but car manufacturing was challenging. Consequently, prices were high and production was low. Mass production techniques of the late 1910s brought down down the cost of automobiles and sales grew dramatically. By 1919 automobile registrations were 6.6 million and truck registrations were 898,000.[113]

Highway system[edit]

In 1900 there were only 200 miles of paved roads outside of cities in the U.S.[114] By the late 1920s automobiles were becoming common, but there were few highways connecting cities. The Federal road building program ended in 1818, leaving states to build roads until the Federal Road act of 1916. A national highway system was agreed on in 1926, at which time there were 23.1 million cars and 3.5 million trucks.In 1926, when an interstate program began, there were 23.1 million cars and 3.5 million trucks. The system was nearly complete when the U. S. entered World War II in December, 1941.[115]


In 1913 Henry Ford introduced the assembly line, a step in the process that became known as mass-production. Frederick W. Taylor pioneered the field of scientific management in the late 19th century, carefully plotting the functions of various workers and then devising new, more efficient ways for them to do their jobs. After 1910 mass production was sped by the electrification of factories, which replaced steam and water power.[116]

In 1913, Henry Ford, adopted the moving assembly line, with each worker doing one simple task in the production of automobiles. Taking his cue from developments during the progressive era, Ford offered a very generous wage—$5 a day—to his workers, arguing that a mass production enterprise could not survive if average workers could not buy the goods. However, the wage increase did not extend to women, and Ford expanded the company's Sociological Department to monitor his workers and ensure that they did not spend their newfound bounty on "vice and cheap thrills".[117]

Gasoline powered tractors began being mass-produced.



The telephone network greatly expanded. Automatic telephone switching, which was introduced in 1892, eliminated the need for telephone operators to manually connect local calls on a switchboard. By 1929, 31.9% of the Bell system was automatic.[118]

Main article: History of radio

Radio communications using Morse code were introduced in the first decade of the 20th century. Their main use was for communicating with ships. Ship radio became more widely used after the sinking of the RMS Titanic in 1912.

Radio technology advanced rapidly. The triode vacuum tube made it possible to build amplifiers for broadcasting and for receivers. Radio circuit design also advanced, allowing better signals with less noise. By the early 1920s radios began being mass-produced and commercial broadcast stations were set up around the country.

Finance, money and banking[edit]

An major economic downturn in 1906 ended the expansion from the late 1890s. This was followed by the Panic of 1907. The Panic of 1907 was a factor in the establishment of the Federal Reserve Bank in 1913.

The mild inflation of the 1890s, attributed to the rising gold supply from mining, continued until World War I, at which time it rose sharply with wartime shortages including labor shortages. Following the war prices corrected.

A debt fueled boom developed following the war. Jerome (1934) gives an unattributed quote about finance conditions that allowed the great industrial expansion of the post WW I period:

"Probably never before in this country had such a volume of funds been available at such low rates for such a long period."[119]

There was also a real estate and housing bubble in the 1920s, especially in Florida, which burst in 1925. Alvin Hansen stated that housing construction during the 1920s decade exceeded population growth by 25%.[120] See also:Florida land boom of the 1920s

Debt reached unsustainable levels. Speculation in stocks drove prices up to unpresented valuation levels. The stock market crashed in late October 1929.

Political developments[edit]

See also: Progressive Era

In the early years of American history, most political leaders were reluctant to involve the federal government too heavily in the private sector, except in the area of transportation. In general, they accepted the concept of laissez-faire, a doctrine opposing government interference in the economy except to maintain law and order. This attitude started to change during the latter part of the 19th century, when small business, farm, and labor movements began asking the government to intercede on their behalf.[121]

Fear of monopolies ("trusts") is shown in this attack on Rockefeller's Standard Oil Company

By the start of the 20th century, a middle class had developed that was leery of both the business elite and the somewhat radical political movements of farmers and laborers in the Midwest and West. Known as Progressives, these people favored government regulation of business practices to, in their minds, ensure competition and free enterprise. Congress enacted a law regulating railroads in 1887 (the Interstate Commerce Act), and one preventing large firms from controlling a single industry in 1890 (the Sherman Antitrust Act). These laws were not rigorously enforced, however, until the years between 1900 and 1920, when Republican President Theodore Roosevelt (1901–1909), Democrat President Woodrow Wilson (1913–1921), and others sympathetic to the views of the Progressives came to power. Many of today's U.S. regulatory agencies were created during these years, including the Interstate Commerce Commission and the Federal Trade Commission. Ida M. Tarbell wrote a series of articles against the Standard Oil monopoly. The series helped pave the way for the breakup of the monopoly.[121]

Noon hour in a furniture factory. Indianapolis, Indiana, 1908

Muckrakers were journalists who encouraged readers to demand more regulation of business. Upton Sinclair's The Jungle (1906) showed America the horrors of the Chicago Union Stock Yards, a giant complex of meat processing that developed in the 1870s. The federal government responded to Sinclair's book with the new regulatory Food and Drug Administration.

President Wilson in 1913 using tariff, currency, and anti-trust laws to "prime the pump" and get the economy working.

When Democrat Woodrow Wilson was elected President with a Democrat controlled Congress in 1912 he implemented a series of progressive policies. In 1913, the Sixteenth Amendment was ratified, and the income tax was instituted in the United States. Wilson resolved the longstanding debates over tariffs and antitrust, and created the Federal Reserve, a complex business-government partnership that to this day dominates the financial world.

World War I[edit]

See also: Liberty bond

The World War involved a massive mobilization of money, taxes, and banking resources to pay for the American war effort and, through government-to-government loans, most of the Allied war effort as well.[122]

Roaring twenties: 1920–1929[edit]

Main article: Roaring Twenties
People filing tax forms in 1920

Under Republican President Warren G. Harding, who called for normalcy and an end to high wartime taxes, Secretary of the Treasury Andrew Mellon raised the tariff, cut other taxes, and used the large surplus to reduce the federal debt by about a third from 1920 to 1930. Secretary of Commerce Herbert Hoover worked to introduce efficiency, by regulating business practices. This period of prosperity, along with the culture of the time, was known as the Roaring Twenties. The rapid growth of the automobile industry stimulated industries such as oil, glass, and road-building. Tourism soared and consumers with cars had a much wider radius for their shopping. Small cities prospered, and large cities had their best decade ever, with a boom in construction of offices, factories and homes. The new electric power industry transformed both business and everyday life. Telephones and electricity spread to the countryside, but farmers never recovered from the wartime bubble in land prices. Millions migrated to nearby cities. However, in October 1929, the Stock market crashed and banks began to fail in the Wall Street Crash of 1929.[123]

From 1929 through World War II[edit]

Pre-war Industry, commerce and agriculture[edit]

Despite the Great Depression and World War II, the middle decades of the 20th century were among the highest for productivity growth.[124][125]


Productivity growth in manufacturing slowed from the electrification ear of the early century, but remained moderate. Automation of factories became widespread during the middle decades as industry invested in newly developed instruments and controls that allowed fewer workers to operate vast factories, refineries and chemical plants with fewer workers. See: Process control

Great Depression: 1929–1941[edit]

Stock exchange trading floor after the 1929 crash
Missouri migrants living in a truck in California. Many displaced people moved to California to look for work during the Depression. John Steinbeck depicted the situation in The Grapes of Wrath

Following the stock market crash, the worldwide economy plunged into the Great Depression. The U.S. money supply to contract by one-third. The protectionist Smoot-Hawley Tariff, which incited retaliation by Canada, Britain, Germany and other trading partners. Congress in 1932 worried about the rapidly growing deficit and national debt, and raised income tax rates. Economists generally agree that these measures deepened an already serious crisis. By 1932, the unemployment rate was 25%. Conditions were worse in heavy industry, lumbering, export agriculture (cotton, wheat, tobacco), and mining. Conditions were not quite as bad in white collar sectors and in light manufacturing.[126]

Franklin Delano Roosevelt was elected President in 1932 without a specific program. He relied on a highly eclectic group of advisors who patched together many programs, known as the New Deal.

Table 2: Depression Data[127]192919311933193719381940
Real Gross National Product (GNP) 1101.484.368.3103.9103.7113.0
Consumer Price Index 2122.5108.792.4102.799.4100.2
Index of Industrial Production 2109756911289126
Money Supply M2 ($ billions)46.642.732.245.749.355.2
Exports ($ billions)5.242.421.673.353.184.02
Unemployment (% of civilian work force)

1 in 1929 dollars
2 1935–39 = 100


Government spending increased from 8.0% of GNP under Hoover in 1932 to 10.2% of GNP in 1936. While Roosevelt balanced the "regular" budget the emergency budget was funded by debt, which increased from 33.6% of GNP in 1932 to 40.9% in 1936.[128] Deficit spending had been recommended by some economists, most notably John Maynard Keynes in Britain. Roosevelt met Keynes but did not pay attention to his recommendations. After a meeting with Keynes, who kept drawing diagrams, Roosevelt remarked that "He must be a mathematician rather than a political economist".[129]

Banking crisis[edit]

In 1929–33 the economy was destabilized by bank failures. The initial reasons were substantial losses in investment banking, followed by bank runs. Bank runs occurred when a large number of customers lost confidence in their deposits (which were not insured) and rushed to withdraw their deposits. Runs destabilized many banks to the point where they faced bankruptcy. Between 1929 and 1933 40% of all banks (9,490 out of 23,697 banks) went bankrupt.[130] Much of the Great Depression's economic damage was caused directly by bank runs.[131]

Hoover had already considered a bank holiday to prevent further bank runs, but rejected the idea because he was afraid to trip a panic. Roosevelt acted as soon as he took office; he closed all the banks in the country and kept them all closed until he could pass new legislation.[132] On March 9, Roosevelt sent to Congress the Emergency Banking Act, drafted in large part by Hoover's top advisors. The act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in hoarded currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks were permanently closed and merged into larger banks. Their deposits totalled $3.6 billion; depositors lost a total of $540 million, and eventually received on average 85 cents on the dollar of their deposits; it is a common myth that they received nothing back.[133] The Glass–Steagall Act limited commercial bank securities activities and affiliations between commercial banks and securities firms to regulate speculations. It also established the Federal Deposit Insurance Corporation (FDIC), which insured deposits for up to $250,000, ended the risk of runs on banks.[134]


The extent to which the spending for relief and public works provided a sufficient stimulus to revive the U.S. economy, or whether it harmed the economy, is also debated. If one defines economic health entirely by the gross domestic product, the U.S. had gotten back on track by 1934, and made a full recovery by 1936, but as Roosevelt said, one third of the nation was ill fed, ill-housed and ill-clothed. See Chart 3. GNP was 34% higher in 1936 than 1932, and 58% higher in 1940 on the eve of war. The economy grew 58% from 1932 to 1940 in 8 years of peacetime, and then grew another 56% from 1940 to 1945 in 5 years of wartime. The unemployment rate fell from 25.2% in 1932 to 13.9% in 1940 when the draft started. During the war the economy operated under so many different conditions that comparison is impossible with peacetime, such as massive spending, price controls, bond campaigns, controls over raw materials, prohibitions on new housing and new automobiles, rationing, guaranteed cost-plus profits, subsidized wages, and the draft of 12 million soldiers.

Chart 3: GDP annual pattern and long-term trend, 1920–40, in billions of constant dollars[135]

In 1995 economist Robert Whaples from Wake Forest University stated that measuring the effect of the New Deal remains a thorny issue for economists because it's so difficult to measure the effects it had on the country. One small survey by Whaples showed that 49% of those economists surveyed felt that the New Deal lengthened and deepened the depression, while 51% disagreed.[136] The same survey also showed that only 5% of professional historians and 27% of professional economists felt the same way. However, economist Eric Rauchway of the University of California stated "very few people disapprove of most of the New Deal reforms", which include Social Security, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and Fannie Mae. Regardless, unemployment peaked in 1932 at 25% and was reduced to 13.9% by 1940.[137]

As Broadus Mitchell summarized, "Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically".[138] Economic indicators show the American economy declined until February 1933. After Roosevelt took office, there began a steady, sharp upward recovery that persisted until the brief Recession of 1937–1938 (see graph) after which they continued their upward climb. Thus the Federal Reserve Index of Industrial Production bottomed at 52.8 on July 1, 1932 and was practically unchanged at 54.3 on March 1, 1933; however by July 1, 1933, it had climbed to 85.5 (with 1935–39 = 100, and for comparison 2005 = 1,342).[139]

Wartime output and controls: 1940–1945[edit]

Women making aluminum shells for the war in 1942

Unemployment dropped to 2%, relief programs largely ended, and the industrial economy grew rapidly to new heights as millions of people moved to new jobs in war centers, and 16 million men and 300,000 women were drafted or volunteered for military service.

All economic sectors grew during the war. Farm output went from an index (by volume) of 106 in 1939 to 128 in 1943. Coal output went from 446 million tons in 1939 to 651 in 1943; oil from 1.3 billion barrels to 1.5 billion. Manufacturing output doubled, from a volume index of 109 in 1939 to 239 in 1943. Railroads strained to move it all to market, going from an output of 13.6 billion loaded car miles in 1939 to 23.3 in 1943.[140]

The War Production Board coordinated the nation's productive capabilities so that military priorities would be met. Converted consumer-products plants filled many military orders. Automakers built tanks and aircraft, for example, making the United States the "arsenal of democracy". In an effort to prevent rising national income and scarce consumer products from causing inflation, the newly created Office of Price Administration rationed and set prices for consumer items ranging from sugar to meat, clothing and gasoline, and otherwise tried to restrain price increases. It also set rent in war centers.[141]

Six million women took jobs in manufacturing and production; most were newly created temporary jobs in munitions. Some were replacing men away in the military. These working women were symbolized by the fictional character of Rosie the Riveter. After the war many women returned to household work as men returned from military service. The nation turned to the suburbs, as a pent-up demand for new housing was finally unleashed.[142]

Postwar prosperity: 1945–1973[edit]

The period from the end of World War II to the early 1970s was a golden era of economic growth. $200 billion in war bonds matured, and the G.I. Bill financed a well-educated work force. The middle class swelled, as did GDP and productivity. This growth was distributed fairly evenly across the economic classes, which some attribute to the strength of labor unions in this period—labor union membership peaked historically in the U.S. during the 1950s, in the midst of this massive economic growth. Much of the growth came from the movement of low income farm workers into better paying jobs in the towns and cities—a process largely completed by 1960. Congress created the Council of Economic Advisors, to promote high employment, high profits and low inflation. The Eisenhower administration (1953–1961) supported an activist contracyclical approach that helped to establish Keynesianism as a bipartisan economic policy for the nation. Especially important in formulating the CEA response to the recession—accelerating public works programs, easing credit, and reducing taxes—were Arthur F. Burns and Neil H. Jacoby. ""I am now a Keynesian in economics", proclaimed Republican President Richard Nixon in 1969.[143] Although this period brought economic expanding to the country as whole, it was not recession proof. The recessions of 1945, 1949, 1953, 1958, and 1960 saw a drastic decline in GDP.

The "Baby Boom" saw a dramatic increase in fertility in the period 1942–1957; it was caused by delayed marriages and childbearing during depression years, a surge in prosperity, a demand for suburban single-family homes (as opposed to inner city apartments) and new optimism about the future. The boom crested about 1957, then slowly declined.[144]


Ammonia from plants built during both world wars to make explosives became available for fertilizers.[145] The early 1950s was he peak period for tractor sales in the U.S. as the few remaining horses and mules were phased out. The horsepower of farm machinery underwent a large expansion.[146] A successful cotton picking machine was introduced in 1949. The machine could do the work of 50 men picking by hand.[147]

Research on plant breeding produced varieties of grain crops that could produce high yields with heavy fertilizer input. This resulted in the Green revolution, beginning in the 1940s. By the century's end yields of corn (maize) rose by a factor of over four. Wheat and soybean yields also rose significantly.

Aircraft and air transportation industries[edit]

Air transport was a major beneficiary of the war. The United States was the leading producer of combat aircraft during World War II and had a large surplus of machine tools and manufacturing facilities for airplanes at the end of the war.[53] There were also experienced airplane manufacturing and maintenance personnel. Additionally, radar had been developed during the war.

The aircraft industry had the highest productivity growth of any major industry, growing by 8.9% per year from 1929-1966.[148]

Interstate highway system[edit]

Construction of the Interstate Highway System began in 1956.

Mainframe computers[edit]

Mainframe business computer systems started being widely introduced in the 1960s. These systems handled a variety of accounting, billing and payroll functions.

One highly significant application was the Sabre airline reservations system, which first went into operation in 1960. With Sabre reservations could be placed remotely using teleprinters and all functions were done automatically, including ticket printing. This eliminated manually handling file cards.

Liberal programs[edit]

Federal taxes on incomes, profits and payrolls had risen to high levels during World War II and had been cut back only slowly; the highest rates for individuals reached the 90% level. Congress cut tax rates in 1964. President Lyndon B. Johnson (1963–69) dreamed of creating a "Great Society", and began many new social programs to that end, such as Medicaid and Medicare.

Military and space spending[edit]

After the Cold War began in 1947, and especially after the Korean War began in 1950 and the government adopted a strategy in NSC-68 military spending soared.[149] Economists examined how much this "military Keynesianism" stimulated the economy.[150]

President Eisenhower feared that excessive military spending would damage the economy, so he downsized the Army after Korea and shifted priorities to missiles and nuclear weapons (which were much less expensive than army divisions). He also promoted the Interstate Highway system as necessary for national defense, and made space exploration a priority. His successor John F Kennedy made a manned mission to the moon a national priority. Much of the new spending went to California and the West, a continuation of wartime spending.[151] An even greater impact came in the South, where it stimulated a modernization of the economy away from cotton towards manufacturing and high technology. For example there were new, large technologically sophisticated installations at the Atomic Energy Commission's Savannah River Site in South Carolina; the Redstone Arsenal at Huntsville in Alabama; nuclear research facilities at Oak Ridge, Tennessee; and space facilities at Cape Canaveral, Florida, at the Lyndon B. Johnson Space Center in Houston, and at the John C. Stennis Space Center in Mississippi.[152]

The Defense Department financed some of private industry's research and development throughout these decades, most notably ARPANET (which would become the Internet).

Late 20th century[edit]

Post industrial (service) economy[edit]

Manufacturing employment and nominal value added shares of the economy have been in a steady decline since World War II. In the late 1960s manufacturing's share of both employment and nominal value added was about 26%, falling to about 11% and 12% respectively by the end of the century.[153]

Per-capita steel consumption in the U.S. peaked in 1977, then fell by half before staging a modest recovery to levels well below the peak.[154]

Service sector expansion[edit]

The decline in the relative size of manufacturing coincided with a rise in the size of the service sector.[124]

Productivity slowdown[edit]

Technological innovations of the final third of the 20th century were significant, but were not as powerful as those of the first two-thirds of the century. Manufacturing productivity growth continued at a somewhat slower than in earlier decades, but overall productivity was dragged down by the government and service sectors.[124]

Inflation woes: 1970s[edit]

The postwar boom ended with a number of events in the early 1970s:

In the late 1960s it was apparent to some that this juggernaut of economic growth was slowing down, and it began to become visibly apparent in the early 1970s. The United States grew increasingly dependent on oil importation from OPEC after peaking production in 1970, resulting in oil supply shocks in 1973 and 1979. Stagflation gripped the nation, and the government experimented with wage and price controls under President Nixon. The Bretton Woods Agreement collapsed in 1971–1972, and President Nixon closed the gold window at the Federal Reserve, taking the United States entirely off the gold standard. President Gerald Ford introduced the slogan, "Whip Inflation Now" (WIN). In 1974, productivity shrunk by 1.5%, though this soon recovered. In 1976, Jimmy Carter won the Presidency. Carter would later take much of the blame for the even more turbulent economic times to come, though some[who?] say circumstances were outside his control. Inflation continued to climb skyward. Productivity growth was small, when not negative. Interest rates remained high, with the prime reaching 20% in January 1981; Art Buchwald quipped that 1980 would go down in history as the year when it was cheaper to borrow money from the Mafia than the local bank.[155]

Unemployment dropped mostly steadily from 1975 to 1979, although it then began to rise sharply.

This period also saw the increased rise of the environmental and consumer movements, and the government established new regulations and regulatory agencies such as the Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Nuclear Regulatory Commission, and others.

Deregulation and Reaganomics: 1976–1992[edit]

Deregulation gained momentum in the mid-1970s, spurred by slow productivity growth and increasing operation and capital costs in several key sectors. It was not until 1978 that the first meaningful deregulation legislation, the Airline Deregulation Act, was cleared by Congress. Transportation deregulation accelerated in 1980, with the deregulation of railroads and trucking. Deregulation of interstate buses followed in 1982. In addition to transportation deregulation, savings and loan associations and banks were partially deregulated with the Depository Institutions Deregulation and Monetary Control Act in 1980 and the Garn–St. Germain Depository Institutions Act in 1982.

On a broader front, the economy initially recovered at a brisk pace from the 1973–75 recession. Incoming president Jimmy Carter instituted a large fiscal stimulus package in 1977 in order to boost the economy. However, inflation began a steep rise beginning in late 1978, and rose by double digits following the 1979 energy crisis. In order to combat inflation, Carter appointed Paul Volcker to the Federal Reserve, who raised interest rates and caused a sharp recession in the first six months of 1980.[156] In March 1980, Carter introduced his own policies for reducing inflation, and the Federal Reserve brought down interest rates to cooperate with the initiatives.[157]

During the 1980 recession, manufacturing shed 1.1 million jobs, while service industries remained intact. Employment in automotive manufacturing in particular suffered, experiencing a 33% reduction by the end of the recession.[158] Collectively these factors contributed to the election of Ronald Reagan in 1980. The Federal Reserve once again began to raise interest rates in 1981, which plunged the economy back into recession. Unemployment rose to a peak of 10.8% in December 1982, a post-war high.[159]

In 1981, Ronald Reagan introduced Reaganomics. That is, fiscally expansive economic policies, cutting marginal federal income tax rates by 25%. Inflation dropped dramatically from 13.5% annually in 1980 to just 3% annually in 1983 due to a short recession and the Federal Reserve Chairman Paul Volcker's tighter control of the money supply and interest rates. Real GDP began to grow after contracting in 1980 and 1982. The unemployment rate continued to rise to a peak of 10.8% by late 1982, but dropped well under 6% unemployment at the end of Reagan's presidency in January 1989. 20 million jobs were created under his presidency – which were made up of 82 percent high-paying and long-term jobs. From 1982 to 1987 the Dow Jones Industrial Average gained over 1900 points from 776 in 1982 to 2722 in 1987 – about a 350% increase. An economic boom took place from 1983 until a recession began in 1990. Between 1983 and 1989 the amount of people below the poverty line decreased by 3.8 million.[160] The boom saw the increasing popularity of electronic appliances like computers, cell phones, music players and video games. Credit cards were a symbol of the boom. The Reagan tax cuts seemed to work and Americans were able to shrug off the crash of 1987 by the beginning of 1988. The growth ended by 1990 after seven years of stock market growth and prosperity for the upper and middle class. The federal debt spawned by his policies tripled (from $930 billion in 1981 to $2.6 trillion in 1988), reaching record levels.[161] Though debt almost always increased under every president in the latter half of the 20th century, it declined as a percentage of GDP under all Presidents after 1950 and prior to Reagan. In addition to the fiscal deficits, the U.S. started to have large trade deficits. Also it was during his second term that the Tax Reform Act of 1986 was passed. Vice President George H. W. Bush was elected to succeed Reagan in 1988. The early Bush Presidency's economic policies were sometimes seen as a continuation of Reagan's policies, but in the early 1990s, Bush went back on a promise and increased taxes in a compromise with Congressional Democrats. He ended his presidency on a moderate note, signing regulatory bills such as the Americans With Disabilities Act, and negotiating the North American Free Trade Agreement. In 1992, Bush and third-party candidate Ross Perot lost to Democrat Bill Clinton.[162]

The advent of deindustrialization in the late 1960s and early 1970s saw income inequality increase dramatically to levels never seen before. But at the same time, most orthodox economists, and most policy makers, pointed to the fact that consumers could buy so many goods, even with the inflation of the 1970s, as evidence that the general shift away from manufacturing and into services was creating widespread prosperity. In 1968, the U.S. Gini coefficient was 0.386. In 2005, the American Gini coefficient had reached 0.469. Critics of economic policies favored by Republican and Democratic administrations since the 1960s, particularly those expanding "free trade" and "open markets" (see Neoliberalism) say that these policies, though benefiting trading as well as the cost of products in the U.S., could have taken their own on the prosperity of the American middle-class. But in this period, consumers were buying as never before with so many products and goods at such low costs and in high quantities. Critics however argued that this consumer behavior was giving a false reading of the health of the economy, because it was being paid for by taking on rapidly increasing levels of indebtedness, thus covering up the stagnating wages and earnings of most of the workforce.

The rise of globalization: 1990s – late 2000s[edit]

Main article: New economy
This graph shows three major stock indices since 1975. Notice the meteoric rise of the stock market in the 1990s, followed by the collapse of the dot-com bubble in 2000 on the tech-heavy NASDAQ.

During the 1990s, government debt increased by 75%, GDP rose by 69%, and the stock market as measured by the S&P 500 grew more than threefold.

From 1994 to 2000 real output increased, inflation was manageable and unemployment dropped to below 5%, resulting in a soaring stock market known as the dot-com boom. The second half of the 1990s was characterized by well-publicized initial public offerings of high-tech and "dot-com" companies. By 2000, however, it was evident a bubble in stock valuations had occurred, such that beginning in March 2000, the market would give back some 50% to 75% of the growth of the 1990s. The economy worsened in 2001 with output increasing only 0.3% and unemployment and business failures rising substantially, and triggering a recession that is often blamed on the September 11 attacks.[citation needed]

An additional factor in the fall of the US markets and in investor confidence included numerous corporate scandals.

From 2001-07, the red-hot housing market across the United States fueled a false sense of security regarding the strength of the U.S. economy.

The 21st century[edit]

Great Recession[edit]

President Barack Obama signs the ARRA into law on February 17, 2009 in Denver, Colorado. Vice President Joe Biden stands behind him.

In 2008 a perfect storm of economic disasters hit the country and indeed the entire world. The most serious began with the collapse of housing bubbles in California and Florida, and the collapse of housing prices and the construction industries. Millions of mortgages (averaging about $200,000 each) had been bundled into securities called collateralized debt obligations that were resold worldwide. Many banks and hedge funds had borrowed hundreds of billions of dollars to buy these securities, which were now "toxic" because their value was unknown and no one wanted to buy them.[163]

A series of the largest banks in the U.S. and Europe collapsed; some went bankrupt, such as Lehman Brothers with $690 billion in assets; others such as the leading insurance company AIG, the leading bank Citigroup, and the two largest mortgage companies were bailed out by the government. Congress voted $700 billion in bailout money, and the Treasury and Federal Reserve committed trillions of dollars to shoring up the financial system, but the measures did not reverse the declines. Banks drastically tightened their lending policies, despite infusions of federal money. The government for the first time took major ownership positions in the largest banks. The stock market plunged 40%, wiping out tens of trillions of dollars in wealth; housing prices fell 20% nationwide wiping out trillions more. By late 2008 distress was spreading beyond the financial and housing sectors, especially as the "Big Three" of the automobile industry (General Motors, Ford and Chrysler) were on the verge of bankruptcy, and the retail sector showed major weaknesses. Critics of the $700 billion Troubled Assets Relief Program (TARP) expressed anger that much of the TARP money that has been distributed to banks is seemingly unaccounted for, with banks being secretive on the issue.[164]

Percent of US civilian working age population employed, 1995–2012

President Barack Obama signed the American Recovery and Reinvestment Act of 2009 in February 2009; the bill provides $787 billion in stimulus through a combination of spending and tax cuts. The plan is largely based on the Keynesian theory that government spending should offset the fall in private spending during an economic downturn; otherwise the fall in private spending may perpetuate itself and productive resources, such as the labor hours of the unemployed, will be wasted. Critics claim that government spending cannot offset a fall in private spending because government must borrow money from the private sector in order to add money to it. However, most economists do not think such "crowding out" is an issue when interest rates are near zero and the economy is stagnant. Opponents of the stimulus also point to problems of possible future inflation and government debt caused by such a large expenditure.[165][166]

In the U.S., jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained.[167]

Historical statistics[edit]

Contributions to Percent Change in Real GDP (1930–1946), source Bureau of Economic Analysis
Contributions to Percent Change in Real GDP (1947–1973), source Bureau of Economic Analysis
Contributions to Percent Change in Real GDP (1974–1990), source Bureau of Economic Analysis
Contributions to Percent Change in Real GDP (1991–2008), source Bureau of Economic Analysis
US share of world GDP (%) since 1980.
US share of world GDP (nominal) peaked in 1985 with 32.74% of global GDP (nominal). The second highest share was 32.24% in 2001.
US share of world GDP (PPP) peaked in 1999 with 23.78% of global GDP (PPP). The share has been declining each year since then.
"Twin deficit" (1960–2006)
Official U.S. unemployment rate, 1950–2005
Standard & Poor's Case–Shiller index constant-quality home price indices
Gini Coefficient for Household Income (1967–2007), source United States Chamber of Commerce

See also[edit]


  1. ^ Perkins 1988, pp. 1
  2. ^ Perkins 1988, pp. 1–5
  3. ^ Perkins 1988, pp. x
  4. ^ a b Perkins 1988
  5. ^ Perkins 1988, pp. 24, 28
  6. ^ Atack, Jeremy; Passell, Peter (1994). A New Economic View of American History. New York: W.W. Norton and Co. p. 36. ISBN 0-393-96315-2. 
  7. ^ Atack & Passell 1994, pp. 36
  8. ^ a b c Atack & Passell 1994
  9. ^ Landes, David. S. (1969). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, New York: Press Syndicate of the University of Cambridge. pp. 89–92. ISBN 0-521-09418-6. 
  10. ^ Atack & Passell 1994, pp. 55
  11. ^ Taylor, George Rogers (1969). The Transportation Revolution, 1815-1860. p. 56. ISBN 978-0873321013. 
  12. ^ Perkins, Edwin J. (1988). The Economy of Colonial America (2nd ed. 1988). New York: Columbia University Press. 
  13. ^ Jack P. Greene and J. R. Pole, eds., A Companion to the American Revolution (2004) chapter 7
  14. ^ Margaret Alan Newell, "The Birth of New England in the Atlantic Economy: From its Beginning to 1770, in Peter Temin, ed., Engines of Enterprise: An Economic History of New England (Harvard UP, 2000), pp. 11–68, esp. p. 41
  15. ^ Gloria L. Main and Jackson T. Main, "The Red Queen in New England?", William and Mary Quarterly, Jan 1999, Vol. 56 Issue 1, pp 121–50 in JSTOR
  16. ^ Perkins 1988, pp. 13
  17. ^ Perkins 1988, pp. 21
  18. ^ Merrill Jensen, The Founding of a Nation: A History of the American Revolution, 1763–1776 (2008)
  19. ^ Greene and Pole, eds., A Companion to the American Revolution (2004) chapters 42, 48
  20. ^ Paul Kennedy, The Rise and Fall of the Great Powers (1987) p. 81, 119
  21. ^ John Brewer, The sinews of power: war, money, and the English state, 1688–1783 (1990) p 91
  22. ^ Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (1962) pp 23–44
  23. ^ Charles Rappleye, Robert Morris: Financier of the American Revolution (2010) pp 225–52
  24. ^ Oliver Harry Chitwood, A History of Colonial America (1961) pp 586–589
  25. ^ Ralph Volney Harlow, "Aspects of Revolutionary Finance, 1775–1783", American Historical Review Vol. 35, No. 1 (Oct., 1929), pp. 46–68 in JSTOR
  26. ^ E. James Ferguson, The power of the purse: A history of American public finance, 1776–1790 (1961)
  27. ^ Erna Risch, Supplying Washington's Army (1982)
  28. ^ E. Wayne Carp, To Starve the Army at Pleasure: Continental Army Administration and American Political Culture, 1775–1783 (1990)
  29. ^ Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (1962)
  30. ^ North 1966, pp. 34
  31. ^ Lewis Cecil Gray, History of agriculture in the southern United States to 1860 (2 vol 1933)
  32. ^ Thomson, Ross (2009). Structures of Change in the Mechanical Age: Technological Invention in the United Sates 1790-1865. Baltimore, MD: The Johns Hopkins University Press. ISBN 978-0-8018-9141-0. 
  33. ^ Habakkuk, H. J. (1962). American and British Technology in the Nineteenth Century. London, U.K., New York, USA: Cambridge University Press. ISBN 978-0521094474. 
  34. ^ North 1966, pp. 69
  35. ^ a b Taylor year-1969, pp. 133
  36. ^ Taylor year-1969, pp. 30
  37. ^ Taylor year-1969, pp. 53
  38. ^ North 1966, pp. 146
  39. ^ Taylor, George Rogers (1969). The Transportation Revolution, 1815-1860. ISBN 978-0873321013. 
  40. ^ Hunter, Louis C. (1985). A History of Industrial Power in the United States, 1730-1930, Vol. 2: Steam Power. Charlottesville: University Press of Virginia. 
  41. ^ Thomson 2009, pp. 32
  42. ^ Hunter year-1985, pp. 14–31
  43. ^ a b Taylor year-1969, pp. 63
  44. ^ Thomson, Ross (2009). Structures of Change in the Mechanical Age: Technological Invention in the United Sates 1790-1865. Baltimore, MD: The Johns Hopkins University Press. p. 46. ISBN 978-0-8018-9141-0. 
  45. ^ Atack & Passell 1994, pp. 429
  46. ^ Thomson, Ross (2009). Structures of Change in the Mechanical Age: Technological Invention in the United Sates 1790-1865. Baltimore, MD: The Johns Hopkins University Press. ISBN 978-0-8018-9141-0.  |page=236
  47. ^ Taylor year-1969, pp. 46
  48. ^ a b c North 1966
  49. ^ Chandler 1993, pp. 57–9
  50. ^ a b Thomson, Ross (1989). The Path to Mechanized Shoe Production in the United States. University of North Carolina Press. ISBN 978-0807818671. 
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    Current-dollar and real GDP. United States Bureau of Economic Analysis. Dec 20, 2007.
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    Inflation-adjusted figures are for base year 2000.


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