Chapter 1. A Brief Economic History of the United States

1-1Chapter 1A Brief Economic History of the United StatesCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesHow 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 economyHow our nation was shaped by suburbanization after World War IIWhat major factors affected our economic growth decade by decade from the 1920s into the new millenniumWhat 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 plentyExpanding technologiesLosing the trade war20 million new jobs since 1990-91Baby boomers better off than previous generations PovertyDying industriesWon the cold warHalf paid less than $15,000 per yearToday’s generation is generally worse off than its parents1-3Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The American Economy in the 19th CenturyAgricultural DevelopmentThe National Railroad NetworkThe Age of the Industrial Capitalist1-4Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Agriculture DevelopmentAt the start of the American revolution, America had an almost limitless supply of landNine of ten Americans lived on a farmOne hundred years later, fewer than one in two didToday, fewer than two in one hundredThese two feed America and create a huge surplus that helps to feed the rest of the worldThe abundance of land was the most influential factor in our economic development in the 19th centuryBrought millions of immigrantsEncouraged large familiesEncouraged rapid technological development1-5Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Agriculture Development(Continued)America’s population1789 4 million1812 8 million 1835 16 million1858 32 million1915 100 million1968 200 million2000 275 million1-6Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Agriculture Development(Continued)America’s large and growing population was extremely important as a market for our farmers and manufacturersForeign countries also targeted the American marketJapan targeted the American market after WW II1-7Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Economic Conflicts Leading to the Civil War NorthBenefited from high protective tariffsHad an economy based on manufacturingOpposed extension of slavery westward SouthHad 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 untenable1-8Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.After the Civil WarNew England, the middle-Atlantic states, and the mid-west were poised for major industrial expansion and experienced significant economic growthThe South remained primarily an agriculture region and experienced economic doldrums until the early 1960s1-9Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The National Railroad Network The completion of the transcontinental railroads1850 The United States had 10,000 miles of track1890 The United States had 164,000 miles of trackThis 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 1-10Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Age of the Industrial CapitalistThe last quarter of the 19th century was the age of the industrial capitalistCarnegie (steel)DuPont (chemicals)McCormick (farm equipment)Rockefeller (oil)1-11Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The American Economy: 1900 through WWIUntil the last quarter of the 19th century, American economic history was largely agriculturalThe beginning of the 20th century witnessed a shift to manufacturingBy the end of WW I, agriculture played a relatively minor role in our economic development1-12Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Industrial DevelopmentBy the turn of the 20th centuryAmerica was primarily an industrial economyFewer than 4 of 10 people lived on farmsThe U.S. was among the world leaders in production of steel, coal, steamships, textiles, apparel, chemicals, and agricultural machineryAmerica had a positive trade balanceAmerica exported most of her agricultural surplusesAmerica began to export manufactured goods1-13Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Industrial Development(Continued)America was on the way to becoming the world’s first mass consumption societyAmerica’s development of the automobile industry was right around the corner1-14Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Industrial Development(Continued) America’s first plane would soon be flying at Kitty HawkCommercial aviation was still a few decades awayAmerican technological progress made possible the era of mass consumption and higher living standards 1-15Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.By WWI the U.S. Had Emerged as the Worlds Leading Industrial Power because ofIts technological talentA large agricultural surplusThe world’s first universal public education systemIts available entrepreneurial abilitiesThe fact that the U.S. was kept out of harm’s way during World War I1-16Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The American Economy between the WarsThe Roaring TwentiesThe Great DepressionThe New Deal1-17Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Roaring TwentiesActually began and ended with depressionsEarly in 1920 consumers began cutting back on purchasesThey 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!1-18Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Great DepressionStarted with the August 1929 recessionHad the stock market not crashed and had the federal government acted more quickly, this might have been a fairly short recessionThe economy hit bottom in March, 1933National output was one-third what it was in 1929Official unemployment was 25%16 million Americans were out of workThe population was less than ½ its present size1-19Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Recession of 1937-38An expansion began in March 1933 and lasted until May 1937Output however did not reach 1929 levelsSeven million people were still unemployed in 1937A system similar to today’s workfare (work for your welfare check) was put in placeAbout 6 million people were put to work on public works type projects1-20Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Recession of 1937-38(Continued)A lot of credit goes to Franklin D. Roosevelt’s “New Deal” administration for the 1933 – 1937 expansionBanks were reopenedThe Government confiscated America’s goldThe Securities and Exchange Commission (SEC) came into beingThe Federal Deposit Insurance Commission (FDIC) was set upAn unemployment insurance benefit program was startedThe Social Security System was startedThis was the most significant reform1-21Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.What Went Wrong in 1937?The Federal Reserve greatly tightened creditThis reduced the money supplyThe Roosevelt administration suddenly got the urge to balance the budgetThis would have made sense during an economic boom but not when the unemployment rate was 12%This causedIndustrial production to fall by 30%Five million more people to be put out of work1-22Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.What Went Right in 1938-41?In April, 1938 the Federal Reserve and the Roosevelt Administration reversed courseWar broke out in Europe in 1939America mobilized in 1940 – 41 and then entered the war on December 7, 1941America was back on the road to recovery1-23Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.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 deficit1-24Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.World War II to VietnamThe country that emerged from WW II was very different from what it had been four years earlierProsperity had replaced depressionInflation was now the number one economic problemThe U.S. accounted for half of the world’s manufacturing outputWith just 7% of the world’s populationThe U.S. and the Soviet Union were the only superpowers left standing1-25Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.World War II to Vietnam(Continued)The U. S. spent tens of billions of dollars to prop up the economies of Western Europe and JapanIt spent hundreds of billions more for their defenseSince WW IIThe U.S. has expended 6% of national output on defenseThe Soviet Union expended at least 18% of national output on defense, which contributed to its collapse in 19901-26Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The 1940s: World War II and Peacetime ProsperityWW II required a total national effortIt consumed half of the nation’s outputIt mobilized 12 million men and womenThe unemployment rate fell below 2%1939 – 1944Output of goods and services doubledGovernment spending rose more than 400%Mainly for defense The economy grew by 10 – 11% a yearThe government instituted wage and price controls and issued ration coupons for meat, butter, gasoline, and other staplesBusiness and workers strived to produce goods of the highest quality possible, believing it a prerequisite to win the war 1-27Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Annual Percentage Growth of U. S. Output of Goods and Services1-28Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Suburbanization of America after WW IITwelve million men and several hundred thousand women returned to civilian lifeThere was a tremendous shortage of housingThe V.A. offered affordable mortgages 1% interest and nothing downThe FHA supplemented this needThe easiest place to build was outside citiesThis required roads and carsThe Federal Government subsidized an interstate highway network along with state freeways, highways, roads, and local streets 1-29Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.1940s and 1950sOne big construction boomThe automobile industry prosperedSupplied America’s pent up demand and became the world’s leading exporter of carsBirth rates shot upCongress 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 YearsThe advent of television and the Korean War stimulated the economyThe Eisenhower administrationEnded the Korean War and inflationMade no attempt to undo the legacies of the New DealSaw the role of the federal government as a major economic player became a permanent one 1-31Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Soaring Sixties: The Years of Kennedy and JohnsonThe country was in recession when Kennedy was electedHe was assassinated and replaced by Johnson in 1963Johnson enacted a tax cut planned by KennedyThe tax cut and the spending on the Vietnam war ended the recessionThe federal budget deficit and the money supply grewInflation began and lasted until the mid-80s1-32Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Soaring Sixties: The Years of Kennedy and Johnson(Continued)Johnson enacted three programs in 1965 that would have profound, long-term effectsMedicareMedicaidFood stamps 1-33Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Sagging Seventies: The Stagflation DecadeNixon was reelected in 1972Faced problems of inflation and ending the Vietnam warInitiated wage and price controls1-34Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Sagging Seventies: The Stagflation Decade(Continued)1973 Economic disaster beganOPEC quadrupled oil pricesThe U.S. had the worst recession since the 1930sThe U.S. faced double digit inflationThe U.S. experienced stagflationEconomic stagnation + inflationNixon’s successor, Gerald Ford, had little success in dampening inflation1-35Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The Sagging Seventies: The Stagflation Decade(Continued)Jimmy Carter was elected President in 1976He presided over mounting budget deficitsThe money supply grew rapidlyInflation rose almost to double digit levelsHe faced the Iranian revolution in 1979Gasoline prices went through the ceilingIn October, 1979 the Fed stopped the growth of the money supplyBy January, 1980 the country was in recessionThe inflation rate was 18%The nation’s productivity growth was at 1%, one-third the postwar rate1-36Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The 1980s: The Age of ReaganSupply-Side versus Keynesian economicsThe objective of both is to stimulate outputKeynesian economicsThe government should spend more money This would give business the incentive to produce moreSupply-Side economicsThe government should cut tax ratesConsumers would then haveMore incentive to workMore of their own money to spend and thus business would produce more1-37Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The1980s: The Age of Reagan(Continued)The country was in a severe recession 1981It was the worst since WW IIUnemployment reached nearly 11% in 1982Inflation had been brought under controlUnemployment rates began fallingThey seemed to stick around 6%Deficits were a problem: $79 billion in 1981 and $290 billion in 1992Business taxes were cutPersonal income taxes were cut1-38Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.George Bush“Read my lips: no new taxes”Bush won the election of 1988Two years later, he agreed to a major tax increase Supposedly to reduce the deficitBut, the deficit continued to riseA recession began in early 1992 and ended late in 1992Bush failed in his bid for reelection1-39Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.To the Millennium and BeyondThe MilitarySince 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?1-40Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.To the Millennium and Beyond(Continued)Real WagesDespite 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 jobsThere has been a weakening of labor unionsThere 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 employeesOne-third of the new jobs created since 1991 have been part-time or temporary1-41Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The State of American AgricultureThe story is one of vastly expanding productivity1850 to 1900 output doubled1900 to 1947 output doubled 1947 to 1960 output doubledIn 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.1-42Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The State of American Agriculture(Continued)Agriculture is one of the most productive sectors of our economyYet, only 4.5 million people live on farms today and less than half farm full timeThe U.S. exports more than one-third of its crops35 million Americans make use of food pantries and other food distribution programsIn the Great Depression, Americans resorted to soup kitchens 1-43Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The State of American Agriculture(Continued)Despite hundreds of billions of dollars in government aid since WW IIFamily farms are disappearing7 out of 10 are now goneThe average farm has gone from 139 acres to 435 acresFamily farms are being squeezed out by huge agriculture combinesToday’s farmers have to become big to survive!The Farm Act of 1996 was supposed to reduce aid payments and eventually phase them outNevertheless, as crop prices sank to 10- and 20-year lows in 1999, payments to farmers were a record $23 billion 1-44Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Other Social and Economic ProblemsGood economic times–monumental problemsCrimeDrugsDisposal of nuclear wasteA permanent underclassDecaying central citiesInterstate highway network problemsAfter years of neglect it is now a work in progressA nation of consumption junkiesPublic and private debt exceeds $20 trillion1-45Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Other Social and Economic Problems(Continued)Questions you need to be thinking aboutWill 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?1-46Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Other Social and Economic Problems(Continued)Who is the largest employer in the United States?Manpower, Inc.A temporary employment agency – our futureA goal of Bank of America is to have 80% of its staff be part-time employeesNo medical insuranceNote that 45 million Americans have no medical insurance1-47Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Other Social and Economic Problems(Continued)America is the world’s largest debtor nation20 years ago we were the largest creditor nationAmerica is hemorrhaging millions of well-paid blue collar jobsAmerica’s educational system turns out one million functional illiterates every year1-48Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.Other Social and Economic Problems(Continued)America has more than 1 in 10 officially classified as poorAmerica has a growing permanent underclass of 4th and 5th generation welfare familiesThis numbers in the hundreds of thousandsAmerica has two million people in prisonYet, many of our streets are not safe1-49Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The “New Economy” of the NinetiesThis was a decade of computerizationIt was a decade of major technological changeAt the close of the century the unemployment rate was 4.1 percentIn the late 90s, the economy was growing at a rate of 5.0 percentAmericans spent money as if there was no tomorrowThere is a growing trade deficit ($300 billion)This cannot go on indefinitely1-50Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.The “New Economy” of the Nineties(Continued)The 1990s are often compared with the 1920sIn both decades the stock market soared Great fortunes were madeIn the 1920s, 1 in 10 Americans owned stockIn the 1990s, 1 in 2 Americans owned stock1-51Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.“We’ve never been better off, but can America keep the party going?”Jonathan Alter, Newsweek, February 7, 20001-52Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.