Chapter 1

A BRIEF ECONOMIC HISTORY OF THE UNITED STATES

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Learning Objectives
After this chapter you should be able to:
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7.

Summarize Americas economic development in the 19 th century.

Describe the effect of the Great Depression on our economy and
evaluate the New Deal measures to bring about recovery.
Discuss the impact of World War II on our economy.
List and discuss the major recessions we have had since World
War II.
Summarize the economic highlights of each decade since the
1950s.
Differentiate the new economy from the old economy.
Assess Americas place in history.

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Interesting Times: Economic Misfortunes

Starting in late 2007, the U.S. experienced the:

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 in the Last 30 Years.

Wealth

Poverty

Expanding technologies

Dying industries

Won the Cold War

Losing the trade war

22 million+ new jobs

Fewer Americans

during the 1990s

Baby boomers better off
than previous
generations

working in early 2010

than 10 years earlier
Todays generation is
generally worse off than
parents

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Strengths of the U.S. Economy

U.S. is still by far the worlds largest economy.
U.S. still has one of the worlds highest standards of

living (per person average).

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Ongoing Weaknesses of the U.S. 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.
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 historical features of our economy

impacted your personal life or the lives of your

family members?
Are you worried about finding a job in your field
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
todays economy: a college graduate or someone who
only completed high school or less?
Do you think the U.S. will continue to be the worlds
largest economy through your lifetime?
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How Did We Get Where We Are?

The American Economy in the 19th Century

Agricultural development
Development of transnational railroad network
The emergence of industrial capitalism

The American Economy in the 20th and early 21st

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

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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 was threatened by Northern

public opinion.
Manufacturing used mostly free labor, especially recent immigrants.
Mostly, there were 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.
o From 18501890, the U.S. increased miles of railroad track from 10,000 to
164,000.
o The government investment in infrastructure sparked economic growth.

Age of Industrial Capitalists emerged.

o Steel (Carnegie), chemical (DuPont), farm equipment (McCormick), oil
(Rockefeller), and meat packing (Swift)
o Rise of trusts and monopolies
o First federal anti-trust legislation
o First wave of unionization as free labor 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.

Americas 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 nations economic
development?

Why do you think the placement of railroad

networks largely bypassed 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 Worlds Leading

Industrial Power at the end of World War I (1918)
The U.S. emerged as the worlds leading industrial

power at the end of WWI because it possessed

physical and human resources such as:

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 worlds 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 in 1929.
Stock market began to soar, 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.

The stock market crashed in 1929the 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 its present size.

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Recovery and Hope

A lot of credit goes to Franklin D. Roosevelts New

Deal administration for the 19331937 expansion:

Banks were reopened.

The Securities and Exchange Commission (SEC) came into being in 1934.
The Federal Deposit Insurance Commission (FDIC) was set up in 1934.
An unemployment insurance benefit program was started .
The Social Security System was started in 1935 (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 good and services.
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Recovery Stalled
Recession of 19371938 was 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 was 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 Roosevelts efforts

with responses to the recent Great Recession.
What caused the Recession of 19371938? What

lessons might this hold for todays 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 19401941 and then entered the war on December 7,

1941.
Massive federal government spending 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 1940s: World War II and Peacetime Prosperity

WWII required a total national effort.

It consumed nearly half of the nations output.

It mobilized 12 million men and women.
The unemployment rate fell below 2%.

19391944

Output of goods and services doubled.

Government spending rose more than 400% (mainly for defense).
The economy grew 1011% 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 of the worlds manufacturing output, with just 7%
of the worlds 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 Soviet Union.
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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 Veterans Administration (V.A.) offered affordable mortgages :

Suburbanization of America

A housing shortage arose, 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 Americas pent up demand.

The U.S. also became the worlds leading exporter of cars.

Birth rates and advent of television fueled demand

for consumer goods and services.

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.
made permanent the role of the federal government as a major economic
player.

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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 that was 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 the
Food Stamp Program that would have profound fiscal impact.

The service sector grew in the public sector with the

expansion of health care and 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 in
1974.

The U.S. experienced stagflation starting in 1973:

Economic stagnation + inflation = stagflation

Why? OPEC (Organization of Petroleum Exporting Countries) quadrupled its oil
prices.
Wage and price controls were initiated.

Carter became President in 1979.

Inflation rose to double digit levels

Iranian revolution in 1979
In October 1979, the Federal Reserve (Fed) stopped the growth of the money
supply to fight inflation but ended up 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 nations productivity growth was at 1%, one third the postwar rate.

A new approach to economic policy was Supply-Side

theory.

Consumers would have more incentive to work and more of their own money
to spend.
Businesses would invest more and produce more.

Did Supply-Side 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)

George H. W. Bush (Reagans 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 does 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
subsidizing agriculture to compete against one
another, leading to the overproduction of food while
millions still go hungry.
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The New Economy of the Nineties

Clinton took office in 1993 as recession was ending.
New

economy was marked by low inflation, low

unemployment, and rapidly growing productivity.

Growth was 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).
This was one of the most prosperous decades ever.
The 120 months of economic expansion, an all time record, ended in
March 2001.

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 20th

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
shifting to low-wage countries.
white collar jobs moving offshore.
routine service and engineering tasks 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

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 was immediately followed by the

War in Iraq in 2003.

Federal budget deficit skyrocketed.

The recovery has been partly fueled by rising home

values and growth of financial sector.

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Economics in Action: Americas Place in

History
U.S. has been the worlds 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?

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