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Chapter 1 A Brief Economic History of the United States Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-1 Chapter Objectives • How we did we grow from a primarily agriculture nation of 4 million people to an industrial power of 290 million? • How the Civil War, World War I, and World War II affected our economy • How our nation was shaped by suburbanization after World War II • What major factors affected our economic growth decade by decade from the 1920s into the new millennium • What the “new economy” is and how it differs from the “old economy” Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-2 Introduction: A Study in Contrast (The United States) • In the midst of plenty • Expanding technologies • Losing the trade war • 22 million new jobs since 1990-91 • Baby boomers better off than previous generations • Poverty • Dying industries • Won the cold war • Half paid less than $15,000 per year • Today’s generation is generally worse off than parents Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-3 The American Economy in the 19th Century • Agricultural Development • The National Railroad Network • The Age of the Industrial Capitalist Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-4 Agriculture Development • At the start of the American revolution, America had an almost limitless supply of land – Nine of ten Americans lived on a farm – One hundred years later, fewer than one in two – Today, fewer than two in one hundred • These two feed America and create a huge surplus that helps to feed the rest of the world • The abundance of land was the most influential factor in our economic development in the 19th century – Brought millions of immigrants – Encouraged large families – Encouraged rapid technological development Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-5 Economic Conflicts Leading to the Civil War • North – Benefited from high protective tariffs • South – Had to pay higher prices than they would have paid for British goods – Had an economy based on manufacturing - Had an economy based on slave labor (agriculture) – Opposed extension of slavery westward - Knew this would be politically untenable Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-6 After the Civil War • New England, the middle Atlantic states, and the mid-west were poised for major industrial expansion and experienced significant economic growth • The south remained primarily an agriculture region and experienced economic doldrums until the early 1960s Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-7 The National Railroad Network • The completion of the transcontinental railroads – 1850 The United States had 10,000 miles of track – 1890 The United States had 164,000 miles of track • This made possible mass production, mass marketing, and mass consumption, which brought the country together into a huge social and economic unit • This made it possible to go almost anywhere in the U.S. by train except in the south (i.e., transcontinental lines by-passed the south – This severely retarded its economic development well into the 20th century Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-8 The Age of the Industrial Capitalist • The last quarter of the 19th century was the age of the industrial capitalist – – – – – Carnegie (steel) Du Pont (chemicals) McCormick (farm equipment) Rockefeller (oil) Swift (meat packing) Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-9 The American Economy in the 20th Century • Until the last quarter of the 19th century, American economic history was largely agricultural • The beginning of the 20th century witnessed a shift to manufacturing • By the end of WW I, agriculture played a relatively minor role in our economic development Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-10 Industrial Development • By the turn of the 20th century – America was primarily an industrial economy • Fewer than 4 of 10 people lived on farms • The U.S. was among the world leaders in production of steel, coal, steamships, textiles, apparel, chemicals, and agricultural machinery – America’s trade balance was positive – America exported most of her agricultural surpluses – America began to export manufactured goods Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-11 Industrial Development (Continued) America’s Population • • • • • • • 1789 1812 1835 1858 1915 1968 2007 4 million people 8 million people 16 million people 32 million people 100 million 200 million Estimate of 300 million Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-12 Industrial Development ) (Continued) • America’s large and growing population was extremely important as a market for our farmer’s and manufacturers – Foreign countries also targeted the American market • Especially Japan after WW II – Japan largely financed its industrial development with American dollars Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-13 Industrial Development (Continued) • America was on the way to becoming the world’s first mass consumption society • America’s development of the automobile industry was right around the corner Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-14 Industrial Development (Continued) • America’s first plane would soon be flying at Kitty Hawk – Commercial aviation was still a few decades away • American technological progress made possible the era of mass consumption and higher living standards Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-15 By the End of WWI the U.S. Emerged As the Worlds Leading Industrial Power Due to: • The technological talent • A large agricultural surplus • The world’s first universal public education system • The available entrepreneurial abilities • The fact that the U.S. was kept out of harm’s way during World War I Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-16 The American Economy in the 20th Century • The Roaring Twenties • The Great Depression • The New Deal Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-17 The Roaring Twenties • Actually began and ended with depressions – Early in 1920 consumers began cutting back on purchases • They were upset with high prices (problem with inflation) – The Federal Reserve tightened credit (decreased the money supply) – The Federal Government reduced spending (cut the budget deficit to zero) – Retailers curtailed purchases (Wholesale prices dropped 45 percent) – The result? A depressed economy! Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-18 The Great Depression • Started with the August 1929 recession – Had the stock market not crashed and had the federal government acted more quickly, this could have been a fairly short recession • The economy hit bottom in March, 1933 – National output was one third what it was in 1929 – Official unemployment was 25 percent – 16 million Americans were out of work • The population was less than ½ its present size Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-19 The Recession of 1937-38 • An expansion began in March 1933 and lasted until May 1937 – Output however did not reach 1929 levels – Seven million people were still unemployed in 1937 – A system similar to today’s workfare (work for your welfare check) was put in place • About 6 million people were put to work on public works type projects Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-20 The Recession of 1937-38 (Continued) • A lot of credit goes to Franklin D. Roosevelt’s “New Deal” administration for the 1933 – 1937 expansion – Banks were reopened – The Government confiscated America’s gold – The Securities and Exchange Commission (SEC) came into being – The Federal Deposit Insurance Commission (FDIC) was set up – An unemployment insurance benefit program was started – The Social Security System was started • This was the most significant reform Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-21 What Went Wrong? • The Federal Reserve greatly tightened credit – This reduced the money supply • The Roosevelt administration suddenly got the urge to balance the budget – This would have made sense during an economic boom but not when the unemployment rate was 12% – This caused • Industrial production to fall by 30% • Five million more people to be put out of work Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-22 What Went Wrong? (Continued) • In April, 1938 the Federal Reserve and the Roosevelt Administration reversed course • War broke out in Europe • America mobilized in 1940 – 41 and then entered the war on December 7, 1941 • America was back on the road to recovery Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-23 What Finally Brought the United States Out of the Great Depression? • The massive federal government spending that was needed to prepare for and fight World War II? – This was deficit spending (borrowed money) – In other words the federal budget ran a deficit Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-24 The End World War II • The country that emerged from WW II was very different from what it had been four years earlier – Prosperity had replaced depression – Inflation was now the number one economic problem – The U.S. accounted for ½ of the world’s manufacturing output • With just 7 percent of the world’s population – The U.S. and the Soviet Union were the only superpowers left standing Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-25 The End of World War II (Continued) • The U. S. spent tens of billions of dollars to prop up the economies of Western Europe and Japan – It spent hundreds of billions more for their defense • Since WW II • The U.S. has expended 6 percent of national output on defense • The Soviet Union expended at least 18 percent of national output on defense which contributed to its collapse in 1990 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-26 The 1940s: World War II and Peacetime Prosperity • WW II required a total national effort – It consumed nearly half of the nation’s output – It mobilized 12 million men and women • The Unemployment rate fell below 2 percent – 1939 – 1944 • Output of goods and services doubled • Government spending rose more than 400 percent – Mainly for defense • The economy grew 10 – 11 percent a year • The government instituted wage and price controls and issued ration coupons for meat, butter, gasoline, and other staples • Business and workers strived to produce goods of the highest quality possible, believing it a prerequisite to win the war Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-27 Annual Percentage Growth of U. S. Output of Goods and Services Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-28 The Suburbanization of America After WW II • Twelve million men and several hundred thousand women returned to civilian lives • There was a tremendous shortage of housing • The V.A. offered affordable mortgages – One percent interest and nothing down – The FHA supplemented this need • The only place to build was outside cities – This required roads and cars – The Federal Government subsidized an interstate highway network along with state freeways, state highways, roads, and local streets Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-29 1940s and 1950s • One big construction boom • The automobile industry prospered – Supplied America’s pent up demand and became the world’s leading exporter of cars • Birth rates shot up • Congress passed the G.I. Bill of Rights (1944) – Provided loans for home mortgages, business, and education Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-30 The 1950s: The Eisenhower Years • The advent of television and the Korean War stimulated the economy • The Eisenhower administration – Ended the Korean War and inflation – Made no attempt to undo the legacies of the New Deal – The role of the federal government as a major economic player became a permanent one Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-31 The Soaring Sixties: The Years of Kennedy and Johnson • The country was in recession when Kennedy was elected – He was assassinated and replaced by Johnson in 1963 • Johnson enacted a tax cut planned by Kennedy – The tax cut and the spending on the Vietnam war ended the recession • The federal budget deficit and the money supply grew • Inflation began and lasted until the mid-80s Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-32 The Soaring Sixties: The Years of Kennedy and Johnson (Continued) • Johnson enacted three programs in 1965 that would have profound long-term effects – Medicare – Medicaid – Food stamps Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-33 The Sagging Seventies: The Stagflation Decade • Nixon became President in 1968 • The decade began with the problems of inflation and ending the Vietnam war – Wage and price controls were initiated – Ford became President when Nixon resigned Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-34 The Sagging Seventies: The Stagflation Decade (Continued) • 1973 Economic disaster began – OPEC quadrupled oil prices – The U.S. was hit by the worst recession since the 1930s – The U.S. faced double digit inflation • The U.S. experienced stagflation – Economic stagnation + inflation Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-35 The Sagging Seventies: The Stagflation Decade (Continued) • Jimmy Carter was President in 1976 – – – – He presided over mounting budget deficits The money supply grew rapidly Inflation rose almost to double digit levels He faced the Iranian revolution in 1979 • Gasoline prices went through the ceiling • In October, 1979 the Fed stopped the growth of the money supply – By January, 1980 the country was in recession • The inflation rate was 18 percent • The nation’s productivity growth was at one percent, one third the postwar rate Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-36 The1980s: The Age of Reagan • Supply-Side vs. Keynesian economics – The objective of both is to stimulate output • Keynesian economics – The government should spend more money – This would give business the incentive to produce more • Supply-Side economics – The government should cut tax rates – Consumers would then have • More incentive to work • More of their own money to spend and business would produce more Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-37 The1980s: The Age of Reagan (Continued) • The country was in a severe recession 1981 • • • • It was the worst since WW II Unemployment reached nearly 11 percent in 1982 Inflation had been brought under control Unemployment rates began falling – They seemed to stick around 6 percent – Deficits were a problem: $79 billion in 1981 and $290 billion in 1992 – Personal income taxes were cut – Business taxes were cut Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 1-38 George Bush • “Read my lips: no new taxes” – Bush won the election of 1988 – Two years later, he agreed to a major tax increase • Supposedly to reduce the deficit • But, the deficit continued to rise – A recession began in early 1992 and ended late in 1992 – Bush failed in his bid for reelection Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-39 The State of American Agriculture • The story is one of vastly expanding productivity In 1820, one – 1850 to 1900 output doubled – 1900 to 1947 output doubled – 1947 to 1960 output doubled In 1800, it took 370 hours to produce 100 bushels of wheat. Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. farmer fed 4.5 people. Today one farmer feeds 100 people. In 1960, it took just 15 hours to produce 100 bushels of wheat. 1-40 The State of American Agriculture (Continued) • Agriculture is one of the most productive sectors of our economy – Yet, only 4.5 million people live on farms today and less than half farm full time – The U.S. exports more than one-third of its crops – 35 million Americans make use of food pantries and other food distribution programs • In the Great Depression, Americans resorted to soup kitchens Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-41 The State of American Agriculture (Continued) • Despite hundreds of billions of dollars in government aid (subsidy payments) since WW II – Family farms are disappearing • 7 out of 10 are now gone • The average farm has gone from 139 acres to 435 acres – Family farms are being squeezed out by huge agriculture combines • Today you have to become big to survive! – The Farm Act of 1996 was supposed to reduce subsidy payments and eventually phase them out • Nevertheless, as crop prices sank to 10 and 20year lows in 1999, subsidy payments to farmers were a record $23 billion Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-42 Subsidy Payments • In 2002 President Bush signed a 10 year $190 billion farm bill that provides the nation’s largest farmers with subsidies of $19 billion. – Defenders point out that the European union gives its farmers $60 billion in annual subsidies • To compete in world markets so do we. – Critics contend that subsidies provide farmers with essentially a guaranteed income so they keep producing more than the market wants • This keeps prices low and the farmers have to continually ask the government for more subsidies Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-43 The “New Economy” of the Nineties • It was a decade of major technological change – Marked by low inflation, low unemployment, and rapidly growing productivity – The 1920s and the 1960s could be similarly described – One of the most prosperous decades ever – The stock market soared • The length of the economic expansion ended in March, 2001 (a period of 120 months) an all-time record Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-44 The “New Economy” of the Nineties (Continued) • The last two decades our economy has become increasingly integrated with the global economy • This has resulted in – An exodus of jobs making shoes, electronics, toys and clothing to developing countries – Service work like writing software code and processing credit card receipts shifted to low-wage countries – White collar jobs now moving offshore – Routine service and engineering tasks are now going to India, China, and Russia • Educated workers are paid a fraction of what their American counterparts earn Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-45 The “American Economy” in the New Millennium • 2001 was not a good year for America – March, 2001 the 10 year economic expansion ended (a recession started) – The stock market started down – Unemployment began to creep up – 9/11 occurred – Unbridled optimism gave way to uncertainty • 2003 the war with Iraq began Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-46 “We’ve never been better off, but can America keep the party going?” Jonathan Alter, Newsweek, February 7, 2000 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-47 Apparently NOT! Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 1-48