A Brief Economic History of the United States Chapter 01 McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

A Brief Economic History of the United

States

Chapter 01

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives

After this chapter you should be able to:1. Summarize America’s economic development in the 19th century.

2. Describe the effect of the Great Depression on our economy and evaluate the New Deal measures to bring about recovery.

3. Discuss the impact of World War II on our economy.

4. List and discuss the major recessions we have had since World War II.

5. Summarize the economic highlights of each decade since the 1950s.

6. Differentiate the “new economy” from the “old economy.”

7. Assess America’s place in history.

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Interesting times: Economic misfortunes starting in late 2007:

Worst economic downturn since the Great Depression of the 1930s

Bursting of the housing bubble (sudden drop in prices) Financial crisis requiring over $2 trillion in loans by the

Federal Reserve and the U.S. Treasury Subprime mortgage crisis, threatening some 7 million

American families with foreclosure

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The U.S. as a Study in Contrasts

Wealth Expanding technologies Won the Cold War 22 million+ new jobs

during the 1990s Baby boomers better off

than previous generations

Poverty Dying industries Losing the trade war Fewer Americans working in

early 2010 than 10 years earlier

Today’s generation is generally worse off than parents

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Strengths of the US Economy

US is still by far the world’s largest economy.• US economy is much larger than China (#2) and Japan

(#3) combined.

US still has one of the world’s highest standards of living (per person average).

Most Americans have decent jobs paying decent wages.

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Ongoing Weaknesses of the US Economy

The federal budget deficit is at a record high, and was growing even before the crisis started in 2007.

The U.S. trade deficit is at a record high (imports greater than exports).

The federal government is borrowing nearly $2 billion a day to finance the budget & trade deficits.

Social Security & Medicare expenditures are rising drastically and Congress needs to act.

The real hourly wage (after inflation) of the average worker is lower today than it was in 1973.

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Questions for Thought and Discussion

How have the above mentioned features of our economy impacted your personal life or the lives of your family members?

Are you worried about finding a decent job when you graduate? Is that affecting decisions you are making about your college education?

Who do you think is more likely to be unemployed in today’s economy: a college graduate or someone who only completed high school or less?

Do you think the U.S. will continue to be the world’s largest economy through your lifetime?

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How Did We Get Where We Are?

The American Economy in the Nineteenth Century• Agricultural Development• Development of Transnational Railroad Network• The Emergence of Industrial Capitalism

The American Economy in the Twentieth and Early Twenty First Centuries

• Industrial Development and the Rise of Manufacturing• Depression and Boom• Rise of Service Sector and Information Technologies• Global Dominance and the Challenges of a Global Economy

Peoples’ economic lives have changed dramatically.

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Agricultural Development

At the start of the American Revolution, America had an almost limitless supply of land.

• Nine out of ten Americans lived on a farm.• One hundred years later, fewer than one in two lived on a farm.• Today, fewer than two in one hundred are able to feed us and

export huge surpluses to the rest of the world.

The abundance of land was the most influential factor in U.S. economic development in the 19th century because labor was scarce relative to land:

• It brought millions of immigrants to the U.S.• It encouraged large families.• It encouraged rapid technological development.

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Economic Conflicts Leading to the Civil War

Fight over tariffs: • Northern manufacturing industries benefited from high tariffs (taxes

on imports) to protect new industries from competition with British.• For Southerners, prices for manufacturing goods were higher than

they would have been without the cost of tariffs. • Southern plantation economy traded cotton and other agricultural

products to the British.

Conflicts over extending slavery in territories: • Southern cotton production based upon slavery threatened by

Northern public opinion. • Manufacturing mostly used “free labor,” especially recent

immigrants. • Mostly self-sufficient family farms in North and West.

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Expansion of North and West After Civil War

Railroad networks led to greater economic integration of the country (except South), facilitating mass production and mass consumption.

• From 1850–1890, the U.S. increased miles of railroad track from 10,000 to 164,000.

• Example of government investment in infrastructure sparking economic growth.

Age of Industrial Capitalists emerged.• Steel (Carnegie), chemical (DuPont), farm equipment (McCormick), oil

(Rockefeller), and meat packing (Swift).• Rise of “trusts” and monopolies.• Response was the first federal anti-trust legislation.• First wave of unionization as free labor tried to improve factory working

conditions and wages.

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The American Economy in the Early 20th Century

America was primarily an industrial economy.• Fewer than 4 of 10 people lived on farms, yet technology meant

U.S. had farm surpluses, encouraging labor to leave farms for factories.

• The U.S. was among the world leaders in production of steel, coal, steamships, textiles, apparel, chemicals, and agricultural machinery.

• Transition from private electric generators to centralized, utility-based power production made manufacturing cheaper.

America’s trade balance was positive (exports greater than imports.)

• America exported most of her agricultural surpluses.• America began to export manufactured goods.

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The U.S. Economy in Booms and Busts

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Questions for Thought and Discussion

What were the pros and cons of instituting protective tariffs for U.S. industry during the early stages of U.S. manufacturing?

• Were they a net positive or net negative factor in the nation’s economic development?

Why do you think the placement of railroad networks largely bypass the southern states?

• Would alternative placement of networks have been beneficial for the country?

How do mass production techniques, like the moving assembly line, enable mass consumption by the middle class?

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The U.S. Emergence as the World’s Leading Industrial Power at the end of WWI

The U.S. emerged as the world’s leading industrial power at the end of WWI because it possessed physical and human resources:

• An undamaged infrastructure and workforce because of late entry into war that took place in Europe.

• A large agricultural surplus emerging from a productive and relatively efficient agricultural sector.

• The technological know-how necessary to develop cutting edge industries such as the automobile and airplane industries. Large and growing population due to 19th century immigration.

• The world’s first universal public education system.• A large pool of entrepreneurial talent.

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The Roaring Twenties to the Great Depression

After a brief depression in 1920, the U.S. economy went through a period of almost unparalleled expansion.

• Between 1921 and 1929 national output rose by 50%.• Number of cars on the road tripled from less than 8 million in 1919

to nearly 27 million in1929. • Stock market soaring, with stocks purchased on margin by putting

down a fraction of the cost. • Most Americans thought prosperity would last forever.

Economic theory emphasized limited government role in economic growth.

However, the stock market crashed in 1929—the “Great Depression” had arrived.

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The Great Depression

Why was The Great Depression “great?”• Automobile market saturated. One car for nearly every household

and most were less than six years old. • Tire industry, textiles, and residential construction also overbuilt. • Stock market crash made consumers wary. • Federal reserve cut money supply causing deflation. • Nothing done about bank failures under Hoover administration.

The economy hit bottom in March of 1933.• National output was one-third what it was in 1929.• Official unemployment was 25%.• 16 million Americans were out of work.

The population was less than ½ its present size.

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Recovery and Hope

A lot of credit goes to Franklin D. Roosevelt’s “New Deal” administration for the 1933–1937 expansion:

• Banks were reopened.• 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).• Temporary job creation programs were established.

Keynesian Economics influential: government should spend money or cut taxes to create demand for businesses.

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Recovery Stalled

Recession of 1937–1938 reignited by actions of the Fed and the Roosevelt Administration.

The Federal Reserve greatly tightened credit.• This reduced the money supply.

The Roosevelt administration suddenly got the urge to balance the budget.

• Government spending sharply reduced and taxes were raised.• 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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Questions for Thought and Discussion

What led the U.S. to go from boom to bust? What made The Great Depression worse than a typical economic downturn?

How did Roosevelt try to restart the economy? Was his strategy successful? Compare Roosevelt’s efforts with responses to the recent downturn.

What caused the Recession of 1937–1938? What lessons might this hold for today’s economy?

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What Finally Brought the U.S. Out of the Great Depression?

In April 1938, the Federal Reserve and the Roosevelt Administration reversed course.

War broke out in Europe.• America mobilized in 1940–1941 and then entered the war on

December 7, 1941.• Massive federal government spending was needed to prepare for

and fight WWII. • This was deficit spending (borrowed money). In other words, the

federal budget ran a deficit.

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The 1940s: World War II and Peacetime Prosperity

WWII 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%.

1939–1944• Output of goods and services doubled.• Government spending rose more than 400% (mainly for defense).• The economy grew 10–11% a year.• The government instituted wage and price controls and issued ration

coupons for meat, butter, gasoline, and other staples.• Businesses and workers strove to produce goods of the highest quality

possible, believing it a prerequisite to win the war.

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The U.S. Emerges as a Superpower

The country that emerged from WWII was very different from what it had been four years earlier.

• Inflation was now the number one economic problem.• The U.S. accounted for ½ of the world’s manufacturing output, with

just 7% of the world’s population.

The Cold War replaced the actual war.• U.S. and the Soviet Union were the only superpowers left.• The U.S. expended 6% of national output on defense. The Soviet

Union expended at least 18% of national output on defense, which contributed to its collapse in 1990.

• The U.S. spent tens of billions of dollars to prop up the economies of Western Europe and Japan, and hundreds of billions more for their defense as allies against the U.S.S.R.

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How Did Prosperity Return?

Twelve million men and several hundred thousand women returned to civilian lives. It was feared that unemployment would return.

• Congress passed the G.I. Bill of Rights (1944). The Bill of Rights provided loans for home mortgages,

business, and education.

• The V.A. offered affordable mortgages:

Suburbanization of America• Housing shortage, but 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.

Government investment spurred private sector.

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1950s: The Boom Years

Construction and automobile industry prospered. • They supplied America’s pent up demand.• The U.S. also became the world’s leading exporter of cars.

Birth rates and advent of television fueled demand for consumer goods.

Korean War stimulated economic growth. 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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Questions for Thought and Discussion

How did WWII impact the American economy? • Why was the war followed by inflation? Is war a good solution for

an economic crisis?

What contributed to suburbanization?• What were the impacts of suburbanization on the U.S. economy?

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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 money supply grew.• Inflation began and lasted until the mid-1980s.• Johnson created three entitlement programs: Medicare, Medicaid,

and food stamps that would have profound fiscal impact.

Growing Service Sector: Expansion of health care and public sector, including education.

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The Sagging Seventies: The Stagflation Decade

The decade began with the problems of inflation and ending the Vietnam war.

• Nixon became President in 1968; Ford became President when Nixon resigned.

The U.S. experienced stagflation starting in 1973: • Economic stagnation + inflation • Why? OPEC quadrupled oil prices. • Wage and price controls were initiated.

Carter became President in 1979.• Inflation rose almost to double digit levels. • Iranian revolution in 1979. • In October 1979, the Federal Reserve stopped the growth of the

money supply, deepening the recession.

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The 1980s: The Age of Reagan

By January 1980, the country was in recession.• The inflation rate was 18%.• The nation’s productivity growth was at 1%, one third the

postwar rate.

New approach to economic policy: Supply-Side economics

• Consumers would have more incentive to work and more of their own money to spend.

• Businesses would invest more and produce more.

Did it work?• Unemployment reached nearly 11% in 1982.• Inflation had been brought under control by Fed policies.• Unemployment rates began falling but seemed to stick around

6%.• Deficits were a problem: $79 billion in 1981 and $290 billion in

1992.

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The 1980s: The Age of Reagan (Continued)

Bush (Reagan’s vice president) won the election of 1988 with a pledge not to raise taxes.

• Two years later, he agreed to a major tax increase.• This was supposedly to reduce the deficit, but the deficit continued

to rise.• A recession began in early 1992 and ended in late 1992.• Bush failed in his bid for reelection.

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Questions for Thought and Discussion

What led to the stagflation of the seventies? • What eventually pulled our economy out of recession?

How dopes Supply Side economics differ from Keynesian economics?

• Did supply side economics work?

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Case Study: State of American Agriculture

American agriculture has increased its productivity tremendously over the past 200 years. In 1820, one farmer could feed 4.5 people. Today, one farmer can feed 500 people.

Despite heavy subsidization, the family farm has disappeared.

Big agribusiness dominates the field and European and American governments spend billions of dollars to subsidize agriculture to compete against one another, leading to the overproduction of food while millions go hungry.

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The “New Economy” of the Nineties

Clinton took office as recession was ending. “New economy” was marked by low inflation, low

unemployment, and rapidly growing productivity. • Growth sparked by major technological changes.• The Federal Government experienced small surpluses by end of

Clinton presidency. • The stock market soared, especially technology-related stocks

(“dot-com” bubble). • One of the most prosperous decades ever.

The length of the economic expansion ended in March 2001 (a period of 120 months); an all-time record.

Just as in the 1920s, it seemed as though the prosperity would never end.

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The American Economy at the End of the Twentieth Century

The U.S. 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.

These factors contributed to the next economic downturn.

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The “New Millennium (continued)

George W. Bush assumed presidency in 2001. 2001 was not a good year for America.

• In March 2001 the 10-year economic expansion ended as a recession started.

• The stock market started going down as the dot-com bubble burst. • Unemployment began to creep up.• 9/11 occurred.• Unbridled optimism gave way to uncertainty.

War in Afghanistan, followed in 2003 by the War in Iraq.

• Federal budget deficit skyrocketed. Recovery partly fueled by rising home values and

growth of financial sector.

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Current Issue: America’s Place in History U.S. has been the world’s leading industrial power,

largest economy, largest consumer market, and largest military power. Will this dominance continue?

Are there lessons from history that can guide U.S. decision makers on how to manage the economy through its present challenges?