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The economic history of the United States has its roots in European colonization in the 16th, 17th, and 18th centuries. Marginal colonial economies grew into 13 small, independent farming economies, which joined together in 1776 to form the United States of America. In 230 years the United States grew to a huge, integrated, industrialized economy that makes up nearly a quarter of the world economy. Major factors in this growth included a large unified market, a supportive political-legal system, vast areas of highly productive farmlands, vast natural resources (especially timber, coal, iron, and oil), and an entrepreneurial spirit and commitment to investing in material and human capital. The economy has maintained high wages, attracting immigrants by the millions from all over the world. Technological and industrial factors played a major role.
In 1492, Christopher Columbus, sailing under the Spanish flag, set out to find Asia and happened upon a "New World". For the next 100 years, Spanish, Portuguese, Dutch, English and French explorers sailed from Europe for the New World, looking for gold, riches, religious merit, honor, and imperial power. But north of Mexico there was little glory and less gold, so most did not stay. The people who eventually did settle arrived later. In 1565 a small fort at St. Augustine, Florida, was founded by the Spanish, and in 1607 a small band of settlers built England's first permanent settlement in what was to become the United States at Jamestown. While they traded among themselves, Native Americans lacked immunities when European explorers began arriving after 1492, bringing new microbes. Their economic systems, for example the economy of the Iroquois, involved various combinations of hunting and gathering and farming. Native American economies were profoundly altered by the arrival of Europeans and the resulting arrival of new diseases, influx of European goods, business relations with the Europeans regarding the fur trade, acquisition of horses, firearms and alcohol, engagement in wars, loss of land, and confinement to reservations.
Early settlers had a variety of reasons for coming to America. The Puritans of Massachusetts wanted to create a purified religion in New England. Other 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.
Throughout the colonies, people lived primarily on small farms and were self-sufficient. 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.
Small local industries emerged as the colonies grew, such as sawmills, and gristmills. Entrepreneurs established shipyards to build fishing fleets and, in time, trading vessels and built iron forges. 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.
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.
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.
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. 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.
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. Heavy spending brought France to the verge of bankruptcy and revolution.
Congress and the American states had no end of difficulty financing the war. 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.
Congress used four main methods to cover the cost of the war, which cost about 66 million dollars in specie (gold and silver). 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. 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.
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.
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.
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. 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.
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.
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. The experience of this war 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 development of these modern machine tools made possible the development of modern industry capable of mass production.
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. 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.
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. 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.
Millions moved to the more fertile farmland of the Midwest. 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.
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.
Railroads made a decisive impact on the U.S. economy especially in the 1850–1873 era, making possible the transition to an urban industrial nation with high finance and advanced managerial skills. Railroads opened up remote areas, drastically cut the cost of moving freight as well as passenger travel, and stimulated new industries such as steel and telegraphy, as well as the profession of civil engineering. They greatly increased the importance of such hubs as made cities such as Atlanta, Billings, Chicago, and Dallas. 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. 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.
Panics did not curtail rapid U.S. economic growth during the 19th century. Long term demographic growth, expansion into new farmlands, and creation of new factories continued. New inventions and capital investment led to the creation of new industries and economic growth. As transportation improved, new markets continuously opened. The steamboat made river traffic faster and cheaper, but development of railroads had an even greater effect, opening up vast stretches of new territory for development. Like canals and roads, railroads received large amounts of government assistance in their early building years in the form of land grants. But unlike other forms of transportation, railroads also attracted a good deal of domestic and European private investment.
Nevertheless, a combination of vision and foreign investment, combined 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.
|Western States and Territories||1,276||11,400||24,587||52,589||62,394|
|Pacific States and Territories||23||1,677||4,080||9,804|
|Source: Chauncey M. Depew (ed.), One Hundred Years of American Commerce 1795–1895 p 111|
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.
The Union grew rich fighting the war, as the Confederate economy was destroyed. 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.
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.
In 1860 the Treasury was a small operation that funded the small-scale operations of the government through the low tariff and land sales. 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. 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.
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. 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." 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. 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.
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.
Agriculture was the largest single industry and it prospered during the war. 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.) The war acted as a catalyst which 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. 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. 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.
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.
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.
The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.
An explosion of new discoveries and inventions took place, a process called the "Second Industrial Revolution." Railroads greatly expanded the mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates. Refrigeration railroad cars came into use. The telephone, phonograph, typewriter and electric light were invented. By the dawn of the 20th century, cars had begun to replace horse-drawn carriages.
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.
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 water power.
The "Gilded Age" of the second half of the 19th century was the epoch of tycoons. Many Americans came to idealize these businessmen who amassed vast financial empires. Often their success lay in seeing the long-range potential for a new service or product, as John D. Rockefeller did with oil. They were fierce competitors, single-minded in their pursuit of financial success and power. Other giants in addition to Rockefeller and Ford included Jay Gould, who made his money in railroads; J. Pierpont Morgan, banking; and Andrew Carnegie, steel. Some tycoons were honest according to business standards of their day; others, however, used force, bribery, and guile to achieve their wealth and power. For better or worse, business interests acquired significant influence over government. Morgan operated on a grand scale in both his private and business life. He and his companions gambled, sailed yachts, gave lavish parties, and built palatial homes; Morgan was also a lay leader of the Episcopal Church and one of the world's leading art collectors. In contrast, men such as Rockefeller and Ford exhibited puritanical qualities. They retained small-town values and lifestyles. As church-goers, they felt a sense of responsibility to others. They believed that personal virtues could bring success; theirs was the gospel of work and thrift. Later their heirs would establish the largest philanthropic foundations in America. While upper-class European intellectuals generally looked on commerce with disdain, most Americans—living in a society with a more fluid class structure—enthusiastically embraced the idea of moneymaking. They enjoyed the risk and excitement of business enterprise, as well as the higher living standards and potential rewards of power and acclaim that business success brought.
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.
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.
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.
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.
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.
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.
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.
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."
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 developed into a major mode of transportation, and electric inter-urban service connected many cities in the Northeast and Midwest. Tractors began being mass-produced.
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.
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.
Following the stock market crash, the worldwide economy plunged into the Great Depression. The Federal Reserve worsened conditions in the U.S. when by allowing the money supply to contract by one-third.[clarification needed] 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.
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. 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."
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. Much of the Great Depression's economic damage was caused directly by bank runs.
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. 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.) 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.
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.
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. 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.
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." 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).
|Table 2: Depression Data||1929||1931||1933||1937||1938||1940|
|Real Gross National Product (GNP) 1||101.4||84.3||68.3||103.9||103.7||113.0|
|Consumer Price Index 2||122.5||108.7||92.4||102.7||99.4||100.2|
|Index of Industrial Production 2||109||75||69||112||89||126|
|Money Supply M2 ($ billions)||46.6||42.7||32.2||45.7||49.3||55.2|
|Exports ($ billions)||5.24||2.42||1.67||3.35||3.18||4.02|
|Unemployment (% of civilian work force)||3.1||16.1||25.2||13.8||16.5||13.9|
1 in 1929 dollars
2 1935–39 = 100
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.
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.
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.
The period from the end of World War II to the early 1970s was a golden era of American capitalism. $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. The U.S. underwent a kind of golden age of economic growth. 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. 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.
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. The government financed some of private industry's research and development throughout these decades, most notably ARPANET (which would become the Internet).
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.
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.
|This section possibly contains original research. (December 2013)|
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. In March 1980, Carter introduced his own policies for reducing inflation, and the Federal Reserve brought down interest rates to cooperate with the initiatives.
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. 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.
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. 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. 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.
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.
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.
An additional factor in the fall of the US markets and in investor confidence included numerous corporate scandals.
Through 2001 to 2007, the red-hot housing market across the United States fueled a false sense of security regarding the strength of the U.S. economy.
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.
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.
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.
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.
United States Annual Economic Data