chap001

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Chapter 1

A Brief Economic History of the United States

Copyright 2008 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 300 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 2008 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• 22 + million new jobs

since 1990-91• Baby boomers better

off than previous generations

• Poverty• Dying industries• Won the cold war• Thousands of college

graduates looking for jobs in 2002 & 2003

• Today’s generation is generally worse off than parents


The Downside of the World’s Largest Economy & One of the

Highest Standards of Living• The federal budget is at a record high• The US trade deficit is at a record high• The federal government is borrowing $2

billion dollars 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

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 1-4

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 United States is close to zero

• The real hourly wage (adjusted for inflation) of the average worker is lower today than it was in 1973


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– 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


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 agriculture and slave labor

- 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)– Du Pont (chemicals)– McCormick (farm equipment)– Rockefeller (oil)– Swift (meat packing)



• 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’s trade balance was positive– America exported most of her agricultural

surpluses– America began to export manufactured

goods


America’s Population• 1789 4 million people• 1812 8 million people• 1835 16 million people• 1858 32 million people• 1915 100 million• 1968 200 million• 2007 Estimate of 300 million


Industrial Development(Continued)

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

American market• Especially Japan after WW II

– Japan largely financed its industrial development with American dollars




• 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



• 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 the End of WWI the U.S. Emerged As the Worlds

Leading Industrial Power• The technological talent• A large agricultural

surplus• The world’s first

universal public education system

• The available entrepreneurial abilities

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


Due to:


• The Roaring Twenties

• The Great Depression

• The New Deal


The Roaring Twenties

• Actually began and ended with depressions– Early in 1920 the country had a brief

depression– Between 1921 and 1929 national output rose

by 50 percent and most Americans thought prosperity would last forever

– However the stock market crashed in1929– The “Great Depression” had arrived


The Great Depression

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

the federal government acted more quickly, this could 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 percent– 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?

• 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 Wrong?(Continued)

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

• War broke out in Europe• 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


The End World War II • 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 ½ of the world’s

manufacturing output• With just 7 percent of the world’s population

– The U.S. and the Soviet Union were the only superpowers left standing


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 WW II• The U.S. has expended 6 percent of

national output on defense• The Soviet Union expended at least 18

percent 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 nearly half of the nation’s output– It mobilized 12 million men and women

• The Unemployment rate fell below 2 percent

– 1939 – 1944• Output of goods and services doubled• Government spending rose more than 400 percent

– Mainly for defense• The economy grew 10 – 11 percent 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


The Suburbanization of America After WW II

• 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 – One percent 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


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 education1-32Copyright 2008 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– 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 spending programs in

1965 that would have profound long-term effects on the economy

– Medicare– Medicaid– Food stamps


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



(Continued)

• 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



(Continued)• Jimmy Carter was 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 percent

• The nation’s productivity growth was at one percent, one third the postwar rate


The1980s: 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


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 percent in 1982

• Inflation had been brought under control

• Unemployment rates began falling

– They seemed to stick around 6 percent

– Deficits were a problem: $79 billion in 1981 and $290 billion in 1992

– Personal income taxes were cut

– Business 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


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 (subsidy payments) 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 you have to become big to survive!

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

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


Subsidy Payments

• In 2002 President Bush signed a 10 year $190 billion farm bill that provides the nation’s largest farmers with subsidies of $19 billion.– Defenders point out that the European union gives

its farmers $60 billion in annual subsidies• To compete in world markets so do we.

– Critics contend that subsidies provide farmers with essentially a guaranteed income so they keep producing more than the market wants

• This keeps prices low and the farmers have to continually ask the government for more subsidies


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 1920s and the 1960s could be similarly

described – 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


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


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 down– Unemployment began to creep up– 9/11 occurred– Unbridled optimism gave way to uncertainty

• 2003 the war with Iraq began


Current IssueAmerica’s Place in History

• In the early years of the 20th Century the United States– Emerged as the world’s leading industrial

power– Had the largest economy and the largest

consumer market– Emerged as the world’s greatest military

power


Tomorrow’s Concerns

• Rising budget deficits

• Trade deficits

• Concern about– Social Security being there when you retire– Medicare being there when you need it– Will we be able to live as well as our

parents?


Tomorrow’s Concerns• In the nineteenth century, the sun never set on the

British empire– The drain of two world wars compelled the British to give up

their empires• By the mid 20th century to the present, American

military bases do the globe– We have become the world’s policeman, perhaps self-anointed,– We are currently involved in Iraq, Afghanistan, A World war

on terror that has come to our shores, and huge problems with securing our on borders

– Many believe we are overextended and stretched too thin both militarily and economically

– This would mean we will have to cut back both militarily and economically

• The big question is will you be able to live as well as your parents?


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

Jonathan Alter, Newsweek, February 7, 2000


Apparently NOT!

Benjamin Franklin said “A question is halfway to

wisdom.”

Hopefully your generation can up with better answers than

that of your parents.1-53Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

chap001

Education

mcgrawhill companies

world war

new economy

trade war

american economy

old economy

civil war north

civil war new england