1-1 Chapter 1 A Brief Economic History of the United States Copyright 2002 by The McGraw-Hill...

1-1

Chapter 1

A Brief Economic History of the United States

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives• How we did we grow from a primarily

agriculture nation of 4 million people to an industrial power of 275 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”

1-2Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction: A Study in Contrast(The United States)

• In the midst of plenty• Expanding

technologies• Losing the trade war• 20 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 its parents


The American Economy in the 19th Century

• Agricultural Development

• The National Railroad Network

• The Age of the Industrial Capitalist


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 did– 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


Agriculture Development(Continued)

• America’s population– 1789 4 million– 1812 8 million – 1835 16 million– 1858 32 million– 1915 100 million– 1968 200 million– 2000 275 million


Agriculture Development(Continued)

• America’s large and growing population was extremely important as a market for our farmers and manufacturers– Foreign countries also targeted the

American market– Japan targeted the American market after

WW II


Economic Conflicts Leading to the Civil War

• North– Benefited from high

protective tariffs

– Had an economy based on manufacturing

– Opposed extension of slavery westward

• South– Had to pay higher

prices than they would have paid for British goods

- Had an economy based on slave labor (agriculture)

- Knew this would be politically untenable


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


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


The Age of the Industrial Capitalist

• The last quarter of the 19th century was the age of the industrial capitalist– Carnegie (steel)– DuPont (chemicals)– McCormick (farm equipment)– Rockefeller (oil)


The American Economy: 1900 through WWI

• 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


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 had a positive trade balance– America exported most of her agricultural

surpluses– America began to export manufactured

goods


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


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


By WWI the U.S. Had Emerged as the Worlds Leading Industrial

Power because of

• Its technological talent• A large agricultural

surplus• The world’s first

universal public education system

• Its available entrepreneurial abilities

• The fact that the U.S. was kept out of harm’s way during World War I


The American Economy between the Wars

• The Roaring Twenties

• The Great Depression

• The New Deal


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 (i.e.,decreased the money supply)

– The Federal Government reduced spending (i.e., cut the budget deficit to zero)

– Retailers curtailed purchases (i.e., wholesale prices dropped 45%)

– The result? A depressed economy!


The Great Depression

• Started with the August 1929 recession– Had the stock market not crashed and had

the federal government acted more quickly, this might 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%– 16 million Americans were out of work

• The population was less than ½ its present size


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


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


What Went Wrong in 1937?

• 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


What Went Right in 1938-41?

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

• War broke out in Europe in 1939• America mobilized in 1940 – 41 and then

entered the war on December 7, 1941• America was back on the road to

recovery


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


World War II to Vietnam• 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 half 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


World War II to Vietnam(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% 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 1940s: World War II and Peacetime Prosperity

• WW II required a total national effort– It consumed 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 by 10 – 11% 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


Annual Percentage Growth of U. S. Output of Goods and Services


The Suburbanization of America after WW II

• Twelve million men and several hundred thousand women returned to civilian life

• There was a tremendous shortage of housing

• The V.A. offered affordable mortgages – 1% interest and nothing down

– The FHA supplemented this need

• The easiest place to build was outside cities– This required roads and cars

– The Federal Government subsidized an interstate highway network along with state freeways, highways, roads, and local streets


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 education1-30Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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– Saw the role of the federal government as a

major economic player became a permanent one


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


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


The Sagging Seventies: The Stagflation Decade

• Nixon was reelected in 1972– Faced problems of inflation and ending

the Vietnam war

– Initiated wage and price controls



(Continued)

• 1973 Economic disaster began– OPEC quadrupled oil prices

– The U.S. had the worst recession since the 1930s

– The U.S. faced double digit inflation

• The U.S. experienced stagflation– Economic stagnation + inflation

• Nixon’s successor, Gerald Ford, had little success in dampening inflation



(Continued)• Jimmy Carter was elected 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


The 1980s: The Age of Reagan• Supply-Side versus 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 thus business would produce more


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% 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

– Business taxes were cut

– Personal income taxes were cut


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


To the Millennium and Beyond

• The Military– Since the demise of the Soviet Union should

the United States have continued to spend $300 billion or more a year on defense?

• Couldn’t some of these resources be used to lessen some of our many social and economic problems?


To the Millennium and Beyond(Continued)• Real Wages

– Despite all our economic growth, real wages for most workers today are slightly less than they were in 1973. Why?

• Plant closings and downsizing have done away with millions of well-paid jobs

• There has been a weakening of labor unions• There are alternative cheaper workers, which

exerts downward pressure on wages • There is an increasing tendency for business to

replace full-time workers with temporary and part-time employees

• One-third of the new jobs created since 1991 have been part-time or temporary


The State of American Agriculture• The story is one of vastly expanding

productivity– 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.

In 1960, it took just 15 hours to produce 100 bushels of wheat.

In 1820, one farmer fed 4.5 people. Today, one farmer feeds 100 people.


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


The State of American Agriculture(Continued)

• Despite hundreds of billions of dollars in government aid 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’s farmers have to become big to survive!

– The Farm Act of 1996 was supposed to reduce aid payments and eventually phase them out

• Nevertheless, as crop prices sank to 10- and 20-year lows in 1999, payments to farmers were a record $23 billion


Other Social and Economic Problems

• Good economic times–monumental problems– Crime– Drugs– Disposal of nuclear waste– A permanent underclass– Decaying central cities– Interstate highway network problems

• After years of neglect it is now a work in progress

– A nation of consumption junkies• Public and private debt exceeds $20 trillion


Other Social and Economic Problems(Continued)

• Questions you need to be thinking about– Will I be able to find a decent job when I

graduate?– Will I be able to live as well as my parents?

• Or will I have to live with my parents?

– Will I be able to collect Social Security benefits?



• Who is the largest employer in the United States?– Manpower, Inc.

• A temporary employment agency – our future

– A goal of Bank of America is to have 80% of its staff be part-time employees

– No medical insurance

– Note that 45 million Americans have no medical insurance



• America is the world’s largest debtor nation– 20 years ago we were the largest creditor

nation

• America is hemorrhaging millions of well-paid blue collar jobs

• America’s educational system turns out one million functional illiterates every year



• America has more than 1 in 10 officially classified as poor

• America has a growing permanent underclass of 4th and 5th generation welfare families– This numbers in the hundreds of thousands

• America has two million people in prison– Yet, many of our streets are not safe


The “New Economy” of the Nineties

• This was a decade of computerization– It was a decade of major technological change

• At the close of the century the unemployment rate was 4.1 percent

• In the late 90s, the economy was growing at a rate of 5.0 percent

• Americans spent money as if there was no tomorrow

• There is a growing trade deficit ($300 billion)– This cannot go on indefinitely


The “New Economy” of the Nineties(Continued)

• The 1990s are often compared with the 1920s– In both decades the stock market soared

• Great fortunes were made

– In the 1920s, 1 in 10 Americans owned stock– In the 1990s, 1 in 2 Americans owned stock


“We’ve never been better off, but can America keep the party going?”

Jonathan Alter, Newsweek, February 7, 2000


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