Chapter 1

A Brief Economic History of the

United States

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 Learning Objectives

 In this chapter you’ll learn:

1. How we grew from a primarily agricultural nation of 4
million people to an industrial power of more than 300
million.
2. How the Civil War, WWI, and WWII affected our economy.
3. The effects of the Great Depression and the New Deal.
4. How our nation was shaped by suburbanization after WWII.
5. What major factors affected our economic growth decade
by decade from the 1920s into the new millennium.
6. What the “new economy” is and how does it differ from the
“old economy.”

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 Introduction: A Study in Contrast
(The United States)

 Wealth  Poverty
 Expanding technologies  Dying industries
 Losing the trade war  Won the Cold War
 22 million+ new jobs  Thousands of college
since 1990–1991 graduates looking for
 Baby boomers better off jobs in 2002 & 2003
than previous  Today’s generation is
generations generally worse off than
parents

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The Downside of the World’s Largest Economy
& One of the Highest Standards of Living

 The federal budget deficit is at a record high.

 The U.S. trade deficit is at a record high.
 The federal government is borrowing $2 billion a
day from foreigners to finance the budget & trade
deficits.
 Social Security & Medicare trust funds will run out
of money well before most of you reach retirement
age.

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The Downside of the World’s Largest Economy
& One of the Highest Standards of Living

 When you graduate, you may not be able to get a

decent job.

 The savings rate in the U.S. is close to zero.

 The real hourly wage (adjusted for 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?

 How serious are trade deficits, budget deficits, and

low savings rates for the health of our economy?

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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
• Growth and Crisis
• Global Dominance and the Challenges of a Global Economy

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

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 Economic Foundations of the Civil War

 The Northern manufacturing industries benefited from

high protective tariffs.
 Public sentiment in the North opposed slavery.
 Southerners were forced to pay higher prices for
manufacturing goods than they would have paid if
they could trade with England or France without a
tariff.
 The Southern plantation economy was based upon
slavery, an institution threatened by Northern public
opinion.

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 Economic Consequences of the
Civil War
 From 1850–1890, the U.S. increased miles of railroad
track from 10,000 to 164,000 (the South was largely
excluded from this transportation network).
 The expansion of railroad networks led to greater
economic integration of the country (with the notable
exception of the South) facilitating mass production,
mass marketing, and mass consumption.
 The latter part of the 19th century would witness the
emergence of great industrial capitalists in steel
(Carnegie), chemical (DuPont), farm equipment
(McCormick), oil (Rockefeller), and meat packing
(Swift).

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 Questions for Thought and Discussion
 What role did protective tariffs play in the economic
development of the U.S.?
• How would our economic history have been
different without these tariffs?

 How did the placement of railroad networks impact

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

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 The American Economy in the Early
20th Century

 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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 The U.S. Emergence as the World’s Leading
Industrial Power by the end of WWI
 Besides strengths in previously mentioned industries,
the U.S. emerged as the world’s leading industrial
power at the end of WWI because it possessed:
• The technological know-how necessary to develop cutting
edge industries such as the automobile and airplane
industries.
• A large agricultural surplus emerging from a productive and
relatively efficient agricultural sector.
• The world’s first universal public education system.
• A large pool of entrepreneurial talent.
• An undamaged infrastructure and workforce during WWI.

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 The Roaring Twenties: Began and Ended with
Depressions

 In early 1920, the country had a brief depression.

 Between 1921 and 1929 national output rose by 50%

and most Americans thought prosperity would last
forever.

 However, the stock market crashed in 1929—the

“Great Depression” had arrived.

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 The Great Depression
 The Great Depression began with the August 1929
recession.
• Had the stock market not crashed and the federal
government acted more quickly, this could have been a fairly
short recession.

 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 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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 Recovery Stalled
 Recession reignited by actions of the Fed and the
Roosevelt Administration in the recession of 1937–
1938.
 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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 Questions for Thought and Discussion
 What led the U.S. to go from boom to bust?

 What could have prevented the Great Depression?

 How did Roosevelt try to restart the economy?

 Was his strategy successful?

 What caused the Recession of 1937–1938?

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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.
 What 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 End World War II
 The country that emerged from WWII 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% 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 WWII
• The U.S. has 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.

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 The Suburbanization of America After WWII
 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:
• 1% 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
 These decades were one big construction boom.
 The automobile industry prospered.
• It supplied America’s pent up demand and the U.S. became
the world’s leading exporter of cars.
 Birth rates shot up.
 Congress passed the G.I. Bill of Rights (1944).
• The Bill of Rights 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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 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? Why did the Soviets
ultimately lose the Cold War if they spent a higher proportion
of their GDP on defense?

 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 the money supply
grew (inflation began and lasted until the mid-80s).
 Johnson created three entitlement programs:
Medicare, Medicaid, and food stamps that would
have profound fiscal impact.

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 The Sagging Seventies: The Stagflation
Decade (Stagnation + Inflation = Stagflation)
 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.
 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 became 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%.
• The nation’s productivity growth was at 1%, one third the
postwar rate.

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 The 1980s: 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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 The 1980s: The Age of Reagan (Continued)

 The country was in a severe recession 1981.

• It was the worst since WWII.
• Unemployment reached nearly 11% in 1982.
• Inflation had been brought under control.
• Unemployment rates began falling.
• They seemed to stick around 6%.
• Deficits were a problem: $79 billion in 1981 and $290 billion in
1992.
• Personal income taxes were cut.
 Bush 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 did 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

 It was a decade of major technological change.

• Marked by low inflation, low unemployment, and rapidly
growing productivity.
• The Federal Government experienced small surpluses.
• 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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 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 going down.
• Unemployment began to creep up.
• 9/11 occurred.
• Unbridled optimism gave way to uncertainty.
 In 2003 the war with Iraq began.
 The U.S. possesses the world’s largest economy and
has developed greater military capabilities than any
nation on earth, yet, there are troubling trends on the
horizon.

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 Tomorrow’s Concerns
 Rising budget deficits
 Trade deficits
 Weakening dollar
 Low savings rates
 Housing bubble
 Rising oil and resource prices
 Concerns about our ability to preserve social security,
Medicare, and other valued governmental programs
 Extensive and expensive military commitments
around the globe

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 Questions for Thought and Discussion
 How do present trends threaten your ability to live a
life that is as comfortable as the life your parents
lived?

 Are there lessons from history that can guide U.S.

decision makers on how to manage the economy
through its present challenges?

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