Chapter 1

A Brief Economic History of the United States

McGraw-Hill/Irwin

2009 The McGraw-Hill Companies, All Rights Reserved

Learning Objectives

In this chapter youll learn:

1.

2. 3. 4. 5.

6.

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

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-2

Introduction: A Study in Contrast (The United States)

Wealth Expanding technologies Losing the trade war 22 million+ new jobs since 19901991 Baby boomers better off than previous generations

Poverty Dying industries Won the Cold War Thousands of college graduates looking for jobs in 2002 & 2003 Todays generation is generally worse off than parents

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-3

The Downside of the Worlds 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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-4

The Downside of the Worlds 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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-5

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?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-6

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

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-7

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-8

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-9

Economic Consequences of the Civil War

From 18501890, 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).
1-10

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-11

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.

Americas trade balance was positive. America exported most of her agricultural surpluses. America began to export manufactured goods.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-12

The U.S. Emergence as the Worlds Leading Industrial Power by the end of WWI

Besides strengths in previously mentioned industries, the U.S. emerged as the worlds 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 worlds first universal public education system. A large pool of entrepreneurial talent. An undamaged infrastructure and workforce during WWI.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-13

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 1929the Great Depression had arrived.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-14

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 its present size.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-15

Recovery and Hope

A lot of credit goes to Franklin D. Roosevelts New Deal administration for the 19331937 expansion:

Banks were reopened. The Government confiscated Americas 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).

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-16

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-17

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 19371938?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-18

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. 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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-19

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-20

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 of the worlds manufacturing output, with just 7% of the worlds population. The U.S. and the Soviet Union were the only superpowers left standing.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-21

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. 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.

Since WWII

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-22

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. This required roads and cars. The Federal Government subsidized an interstate highway network along with state freeways, state highways, roads, and local streets.

The only place to build was outside cities.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-23

1940s and 1950s

These decades were one big construction boom. The automobile industry prospered.

It supplied Americas pent up demand and the U.S. became the worlds 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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-24

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-25

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?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-26

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. The tax cut and the spending on the Vietnam war ended the recession.

Johnson enacted a tax cut planned by Kennedy.

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-27

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. OPEC quadrupled oil prices. The U.S. was hit by the worst recession since the 1930s. The U.S. faced double digit inflation. Economic stagnation + inflation

1973 Economic disaster began.

The U.S. experienced stagflation.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-28

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. The inflation rate was 18%. The nations productivity growth was at 1%, one third the postwar rate.

By January 1980, the country was in recession.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-29

The 1980s: The Age of Reagan

Supply-Side vs. Keynesian economics

The objective of both is to stimulate output. The government should spend more money. This would give business the incentive to produce more. The government should cut tax rates. Consumers would then have

Keynesian economics

Supply-Side economics

More incentive to work. More of their own money to spend and business would produce more.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-30

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.
1-31

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-32

Case StudyState 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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-33

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-34

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.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-35

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 worlds largest economy and has developed greater military capabilities than any nation on earth, yet, there are troubling trends on the horizon.

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-36

Tomorrows 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

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-37

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?

2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

1-38