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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.
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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”
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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
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The American Economy in the
19th Century
• Agricultural Development
• The National Railroad Network
• The Age of the Industrial Capitalist
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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
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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
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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
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The American Economy in the
20th Century
• The Roaring Twenties
• The Great Depression
• The New Deal
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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!
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Annual Percentage Growth of U. S. Output of Goods and Services
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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farmer fed 4.5
people. Today
one farmer feeds
100 people.
In 1960, it took
just 15 hours to
produce 100
bushels of wheat.
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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
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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
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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
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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
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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
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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
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“We’ve never been better off,
but can America keep the
party going?”
Jonathan Alter, Newsweek,
February 7, 2000
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Apparently NOT!
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