The economic history of the United States has its roots in European colonization in the 16th, 17th, and 18th centuries. Marginal colonial economies grew into 13 small, independent farming economies, which joined together in 1776 to form the United States of America. In 230 years the United States grew to a huge, integrated, industrialized economy that makes up nearly a quarter of the world economy. The main causes were a large unified market, a supportive political-legal system, vast areas of highly productive farmlands, vast natural resources (especially timber, coal, iron, and oil), and an entrepreneurial spirit and commitment to investing in material and human capital. The economy has maintained high wages, attracting immigrants by the millions from all over the world. Technological and industrial factors played a major role.
While they traded among themselves, Native Americans lacked immunities when European explorers began arriving after 1492, bringing new microbes. Their economic systems, for example the economy of the Iroquois, involved various combinations of hunting and gathering and farming. Native American economies were profoundly altered by the arrival of Europeans and the resulting arrival of new diseases, influx of European goods, business relations with the Europeans regarding the fur trade, acquisition of firearms and alcohol, engagement in wars, loss of land, and confinement to reservations.
In 1492, Christopher Columbus, sailing under the Spanish flag, set out to find Asia and happened upon a "New World". For the next 100 years, Spanish, Portuguese, Dutch, English and French explorers sailed from Europe for the New World, looking for gold, riches, religious merit, honor, and imperial power. But north of mexico there was little glory and less gold, so most did not stay. The people who eventually did settle arrived later. In 1565 a small fort at St. Augustine, Florida, was founded by the Spanish, and in 1607 a small band of settlers built England's first permanent settlement in what was to become the United States at Jamestown, Virginia.
Shipping scene in Salem, Massachusetts, a shipping hub, in the 1770s
Early settlers had a variety of reasons for coming to America. The Puritans of Massachusetts wanted to create a purified religion in New England. Other colonies, such as Virginia, were founded principally as business ventures. England's success at colonizing what would become the United States was due in large part to its use of charter companies. Charter companies were groups of stockholders (usually merchants and wealthy landowners) who sought personal economic gain and, perhaps, wanted also to advance England's national goals. While the private sector financed the companies, the King provided each project with a charter or grant conferring economic rights as well as political and judicial authority. The colonies generally did not show quick profits, however, and the English investors often turned over their colonial charters to the settlers. The political implications, although not realized at the time, were enormous. The colonists were left to build their own lives, their own communities, and their own economy.
throughout the colonies, people lived primarily on small farms and were self-sufficient. In the few small cities and among the larger plantations of South Carolina, and Virginia, some necessities and virtually all luxuries were imported in return for tobacco, rice, and indigo exports.
Small local industries emerged as the colonies grew, such as sawmills, and gristmills. Entrepreneurs established shipyards to build fishing fleets and, in time, trading vessels and built iron forges. By the 18th century, regional patterns of development had become clear: the New England colonies relied on shipbuilding and sailing to generate wealth; plantations (many using slave labor) in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo; and the middle colonies of New York, Pennsylvania, New Jersey, and Delaware shipped general crops and furs. Except for slaves, standards of living were generally high—higher, in fact, than in England itself.
Americans in the Thirteen Colonies demanded their rights as Englishmen, as they saw it, to select their own representatives to govern and tax them - which Britain refused. The Americans attempted resistance through boycotts of British manufactured items, but the British responded with a rejection of American rights and the Intolerable Acts of 1774. In turn, the Americans launched the American Revolution, resulting in an all-out war against the British and to independence for the new United States of America. The British tried to crush the American economy with a blockade of all ports, but with 90% of the people in farming, and only 10% in cities, the American economy proved resilient and able to support a sustained war, which lasted 1775-1783.
Revolutionary era cartoon showing US sawing of the horn of a cow (symbolizing a break from British commerce) with a distressed Englishman watching as other European powers wait to collect milk. The cartoon represents the commercial status of the US during the Revolution.
The American Revolution (1775–1783) brought a dedication to unalienable rights to "life, liberty, and property," which emphasize individual liberty and economic entrepreneurship, and simultaneously a commitment to the political values of Republicanism, which emphasize civic virtue and duty. However, due to the cost of the war, hyperinflation occurred. Soldiers were given land out west, but the national and state governments were unable to repay the money they had borrowed to fight the war.
trends in economic growth, 1700–1850
The U.S. Constitution, adopted in 1787, established that the entire nation was a unified, or common market, with no internal tariffs or taxes on interstate commerce. The extent of federal power was much debated, with Alexander Hamilton taking a very broad view as the first secretary of the treasury during the presidential administration of George Washington. He succeeded in building a strong national credit based on taking over the state debts and bundling them with the old national debt into new securities sold to the wealthy. They in turn now had an interest in keeping the new government solvent. Hamilton funded the debt with tariffs on imported goods and a highly controversial tax on whiskey. Hamilton believed the United States should pursue economic growth through diversified shipping, manufacturing, and banking. He sought and achieved Congressional authority to create the First Bank of the United States in 1791; the charter lasted until 1811.
Thomas Jefferson and James Madison opposed a strong central government (and, consequently, most of Hamilton's economic policies), but they could not stop Hamilton, who wielded immense power and political clout in the Washington administration. In 1801, however, Jefferson became president and turned to promoting a more decentralized, agrarian democracy called Jeffersonian democracy. (He based his philosophy on protecting the common man from political and economic tyranny. He particularly praised small farmers as "the most valuable citizens.") However, Jefferson did not change Hamilton's basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20 year charter.
Expansion and growth
"The First Cotton Gin" conjectural image from 1869
Cotton, at first a small-scale crop in the South, boomed following Eli Whitney's invention in 1793 of the cotton gin, a machine that separated raw cotton from seeds and other waste. Soon, large plantations, based on slave labor, expanded in the richest lands from the Carolinas westward to Texas. The raw cotton was shipped to textile mills in Britain, France and New England.
Millions moved to the more fertile farmland of the Midwest. States built roads and waterways, such as the Cumberland Pike (1818) and the Erie Canal (1825), opening up markets for western farm products. The Whig Party supported Clay's American System, which proposed to build internal improvements (e.g. roads, canals and harbors), protect industry, and create a strong national bank. The Whig legislation program was blocked at the national level by the Democrats, but similar modernization programs were enacted in most states on a bipartisan basis.
Scene of Lockport on the Erie Canal (W. H. Bartlett 1839)
President Andrew Jackson (1829–1837), leader of the new Democratic Party, opposed the Second Bank of the United States, which he believed favored the entrenched interests of rich. When he was elected for a second term, Jackson blocked the renewal of the bank's charter. Jackson opposed paper money and demanded the government be paid in gold and silver coins. The Panic of 1837 stopped business growth for three years.
Rail transport in the United States
Railroads made a decisive impact on the U.S. economy especially in the 1850-1873 era, making possible the transition to an urban industrial nation with high finance and advanced managerial skills. Railroads opened up remote areas, drastically cut the cost of moving freight as well as passenger travel, and stimulated new industries such as steel and telegraphy, as well as the profession of civil engineering. They greatly increased the importance of such hubs as made cities such as Atlanta, Billings, Chicago, and Dallas. Railroad executives invented modern methods for running large-scale business operations, creating a blueprint that all large corporations basically followed. They created career tracks that took 18 year old boys and turned them into brakemen, conductors and engineers. They were first to encounter managerial complexities, labor union issues, and problems of geographical competition. Due to these radical innovations, the railroad became the first large-scale business enterprise and the model for most large corporations.
Panics did not curtail rapid U.S. economic growth during the 19th century. Long term demographic growth, expansion into new farmlands, and creation of new factories continued. New inventions and capital investment led to the creation of new industries and economic growth. As transportation improved, new markets continuously opened. The steamboat made river traffic faster and cheaper, but development of railroads had an even greater effect, opening up vast stretches of new territory for development. Like canals and roads, railroads received large amounts of government assistance in their early building years in the form of land grants. But unlike other forms of transportation, railroads also attracted a good deal of domestic and European private investment.
Nevertheless, a combination of vision and foreign investment, combined with the discovery of gold and a major commitment of America's public and private wealth, enabled the nation to develop a large-scale railroad system, establishing the base for the country's industrialization.
Table 1: RAILROAD MILEAGE INCREASE BY GROUPS OF STATES
1850 1860 1870 1880 1890
New England 2,507 3,660 4,494 5,982 6,831
Middle States 3,202 6,705 10,964 15,872 21,536
Southern States 2,036 8,838 11,192 14,778 29,209
Western States and Territories 1,276 11,400 24,587 52,589 62,394
Pacific States and Territories 23 1,677 4,080 9,804
TOTAL USA 9,021 30,626 52,914 93,301 129,774
SOURCE: Chauncey M. Depew (ed.), One Hundred Years of American Commerce 1795–1895 p 111
1864, Pennsylvania oil drilling early in the history of the American oil industry
Sharecropper plowing in Alabama (1937)
By 1860, on the eve of Civil War, 16% of the people lived in cities with 2500 or more people; a third of the nation's income came from manufacturing. Urbanized industry was limited primarily to the Northeast; cotton cloth production was the leading industry, with the manufacture of shoes, woolen clothing, and machinery also expanding. Most of the workers in the new factories were immigrants or their children. Between 1845 and 1855, some 300,000 European immigrants arrived annually. Many remained in eastern cities, especially mill towns and mining camps, while those with farm experience and some savings bought farms in the West.
Civil War and Reconstruction: 1860s
The South, on the other hand, remained rural and dependent on the North for capital and manufactured goods. Southern economic interests, including slavery, could be protected by political power only as long as the South controlled the federal government. The Republican Party, organized in 1856, represented the industrialized North. In 1860, Republicans and their presidential candidate, Abraham Lincoln called for ending the expansion of slavery and instead expanding industry, commerce and business. In 1861, they successfully pushed adoption of a protective tariff. In 1862, the first Pacific railroad was chartered. In 1863 a national banking system was established to finance the American Civil War; in every city a "First National Bank" was established, and many still exist.
The industrial advantages of the North over the South helped secure a Northern victory in the American Civil War (1861–1865). The Northern victory sealed the destiny of the nation and its economic system. The slave-labor system was abolished; the world price of cotton plunged, making the large southern cotton plantations much less profitable. Northern industry, which had expanded rapidly before and during the war, surged ahead. Industrialists came to dominate many aspects of the nation's life, including social and political affairs.
The devastation of the South was great and poverty ensued; incomes of whites dropped, but income of the former slaves rose. During Reconstruction railroad construction was heavily subsidized (with much corruption), but the region maintained its dependence on cotton. Former slaves became wage laborers, tenant farmers, or sharecroppers. They were joined by many poor whites, as the population grew faster than the economy. As late as 1940 the only significant manufacturing industries were textile mills in the Carolinas, and some steel in Alabama.
The Gilded Age: 1865–1900
Steel workers in 1905, Meadville, Philadelphia
The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.
An explosion of new discoveries and inventions took place, a process called the "Second Industrial Revolution." Railroads greatly expanded the mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates. Refrigeration railroad cars came into use. The telephone, phonograph, typewriter and electric light were invented. By the dawn of the 20th century, cars had begun to replace horse-drawn carriages.
Parallel to these achievements was the development of the nation's industrial infrastructure. Coal was found in abundance in the Appalachian Mountains from Pennsylvania south to Kentucky. Oil was discovered in western Pennsylvania; it was mainly used for lubricants and for kerosene for lamps. Large iron ore mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where these coal and iron ore could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories.
By 1910 Henry Ford introduced mass-production methods. Frederick W. Taylor pioneered the field of scientific management in the late 19th century, carefully plotting the functions of various workers and then devising new, more efficient ways for them to do their jobs. After 1910 mass production was sped by the electrification of factories, which replaced water power.
1904 cartoon entitled "Next!" depicting Standard Oil as a ruthless octopus
The "Gilded Age" of the second half of the 19th century was the epoch of tycoons. Many Americans came to idealize these businessmen who amassed vast financial empires. Often their success lay in seeing the long-range potential for a new service or product, as John D. Rockefeller did with oil. They were fierce competitors, single-minded in their pursuit of financial success and power. Other giants in addition to Rockefeller and Ford included Jay Gould, who made his money in railroads; J. Pierpont Morgan, banking; and Andrew Carnegie, steel. Some tycoons were honest according to business standards of their day; others, however, used force, bribery, and guile to achieve their wealth and power. For better or worse, business interests acquired significant influence over government. Morgan operated on a grand scale in both his private and business life. He and his companions gambled, sailed yachts, gave lavish parties, and built palatial homes; Morgan was also a lay leader of the Episcopal Church and one of the world's leading art collectors. In contrast, men such as Rockefeller and Ford exhibited puritanical qualities. They retained small-town values and lifestyles. As church-goers, they felt a sense of responsibility to others. They believed that personal virtues could bring success; theirs was the gospel of work and thrift. Later their heirs would establish the largest philanthropic foundations in America. While upper-class European intellectuals generally looked on commerce with disdain, most Americans—living in a society with a more fluid class structure—enthusiastically embraced the idea of moneymaking. They enjoyed the risk and excitement of business enterprise, as well as the higher living standards and potential rewards of power and acclaim that business success brought.
Real gross national product per capita of the United States 1869-1918
The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita, despite the panic of 1873. The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8%, while the GDP was also doubled. Economist Milton Friedman states that for the 1880s:
The highest decadal rate [of growth of real reproducible, tangible wealth per head from 1805 to 1950] for periods of about ten years was apparently reached in the eighties with approximately 3.8 percent."
However, Raymond W. Goldsmith, who originated the figures Friedman gives in this statement, had reservations about the data, stating that "a few of these are too much influenced by the cyclical position of the benchmark years or by possible errors in the estimates for the initial or terminal year to constitute measures of long-term trend." Goldsmith specifically compared his figures for the 1880s and 1890s, stating "that while 1880 and 1890 were years of prosperity, 1900 marked a cyclical trough, and that measures of economic activity eliminating trend are considerably higher for the 'eighties than for the 'nineties."
Austrian Economist and scholar Murray Rothbard stated that for the 1880s:
Gross domestic product almost doubled from the decade before, a far larger percentage jump decade-on-decade than any time since.
Capital investment also increased tremondously during the 1880s, increasing nearly 500%, while capital formation doubled during the decade. Rothbard states that:
This massive 500-percent decade-on-decade increase has never since been even closely rivaled. It stands in particular contrast to the virtual stagnation witnessed by the 1970s.
Long-term interest rates also declined to 3 to 3.5% for the first time, reaching the same level as Britain and 17th century Holland.
The American labor movement began with the first significant labor union, the Knights of Labor in 1869. The Knights collapsed in the 1880s and were displaced by strong international unions that banded together as the American Federation of Labor under Samuel Gompers. Rejecting socialism, the AFL unions negotiated with owners for higher wages and better working conditions. Union growth was slow until 1900, then grew to a peak during World War I.
To modernize traditional agriculture reformers founded the Grange movement, in 1867. Federal land grants helped each state create an agricultural college and a network of extension agents who demonstrated modern techniques to farmers. Wheat and cotton farmers in the 1890s supported the Populist movement, but failed in their demands for free silver and inflation. Instead the 1896 election committed the nation to the gold standard and a program of sustained industrialization.
During the period, a series of recessions happened.
Panic of 1873 had New York Stock Exchange closed for ten days, of the country's 364 railroads, 89 went bankrupt, a total of 18,000 businesses failed between 1873 and 1875, unemployment reached 14% by 1876, during a time which became known as the Long Depression.
The end of the Gilded Age coincided with the Panic of 1893, a deep depression that lasted until 1897 and marked a major political realignment in the election of 1896.
1900 panoramic image of the Chicago slaughter houses
Carnegie Steel Co. facility in Ohio c.1910
Progressive Era: 1890–1920
Eight-hour workday demonstration in New York (1871)
A political cartoon symbolically depicting President Wilson using tariff, currency, and anti-trust laws to prime the pump and get the economy working.
Main article: Progressive Era
In the early years of American history, most political leaders were reluctant to involve the federal government too heavily in the private sector, except in the area of transportation. In general, they accepted the concept of laissez-faire, a doctrine opposing government interference in the economy except to maintain law and order. This attitude started to change during the latter part of the 19th century, when small business, farm, and labor movements began asking the government to intercede on their behalf.
By the turn of the century, a middle class had developed that was leery of both the business elite and the somewhat radical political movements of farmers and laborers in the Midwest and West. Known as Progressives, these people favored government regulation of business practices to, in their minds, ensure competition and free enterprise. Congress enacted a law regulating railroads in 1887 (the Interstate Commerce Act), and one preventing large firms from controlling a single industry in 1890 (the Sherman Antitrust Act). These laws were not rigorously enforced, however, until the years between 1900 and 1920, when Republican President Theodore Roosevelt (1901–1909), Democratic President Woodrow Wilson (1913–1921), and others sympathetic to the views of the Progressives came to power. Many of today's U.S. regulatory agencies were created during these years, including the Interstate Commerce Commission and the Federal Trade Commission. Muckrakers were journalists who encouraged readers to demand more regulation of business. Upton Sinclair's The Jungle (1906) showed America the horrors of the Chicago Union Stock Yards, a giant complex of meat processing that developed in the 1870s. The federal government responded to Sinclair's book with the new regulatory Food and Drug Administration. Ida M. Tarbell wrote a series of articles against the Standard Oil monopoly. The series helped pave the way for the breakup of the monopoly.
When Democrat Woodrow Wilson was elected President with a Democratic Congress in 1912 he implemented a series of progressive policies. In 1913, the Sixteenth Amendment was ratified, and the income tax was instituted in the United States. Wilson resolved the longstanding debates over tariffs and antitrust, and created the Federal Reserve, a complex business-government partnership that to this day dominates the financial world.
In 1913, Henry Ford, adopted the moving assembly line, with each worker doing one simple task in the production of automobiles. Taking his cue from developments during the progressive era, Ford offered a very generous wage—$5 a day—to his workers, arguing that a mass production enterprise could not survive if average workers could not buy the goods. However, the wage increase did not extend to women, and Ford expanded the company's Sociological Department to monitor his workers and ensure that they did not spend their new found bounty on "vice and cheap thrills."
Roaring twenties: 1920–1929
People filing tax forms in 1920
Under Republican President Warren G. Harding, who called for normalcy and an end to high wartime taxes, Secretary of the Treasury Andrew Mellon raised the tariff, cut other taxes, and used the large surplus to reduce the federal debt by about a third from 1920 to 1930. Secretary of Commerce Herbert Hoover worked to introduce efficiency, by regulating business practices. This period of prosperity, along with the culture of the time, was known as the Roaring Twenties. The rapid growth of the automobile industry stimulated industries such as oil, glass, and road-building. Tourism soared and consumers with cars had a much wider radius for their shopping. Small cities prospered, and large cities had their best decade ever, with a boom in construction of offices, factories and homes. The new electric power industry transformed both business and everyday life. Telephones and electricity spread to the countryside, but farmers never recovered from the wartime bubble in land prices. Millions migrated to nearby cities. However, in October 1929, the stock market crashed and banks began to fail in the Wall Street Crash of 1929.
Great Depression: 1929–1941
Great Depression in the United States
Stock exchange trading floor after the 1929 crash
Missouri migrants living in a truck in California. Many displaced people moved to California to look for work during the Depression. John Steinbeck depicted the situation in The Grapes of Wrath
Following the stock market crash, the economy plunged into the Great Depression. The Federal Reserve Board did not cause the depression but it made no effort to intervene by helping banks. The money supply fell by one-third, and it was hard to get a loan. In his last year as president, Herbert Hoover passed a massive tax increase to boost sagging federal revenues, and signed the protectionist Smoot-Hawley Tariff, which incited retaliation by Canada, Britain, Germany and other trading partners. Economists generally agree that these measures deepened an already serious crisis. By 1932, the unemployment rate was 23.6%. Conditions were worse in heavy industry, lumbering, export agriculture (cotton, wheat, tobacco), and mining. Conditions were not quite as bad in white collar sectors and in light manufacturing.
Franklin Delano Roosevelt was elected President in 1932 without a specific program. He relied on a highly eclectic group of advisors who patched together many programs, known as the New Deal.
The economy eventually recovered from the low point of the winter of 1932-33, with sustained improvement until 1937, when the Recession of 1937 brought back 1934 levels of unemployment. There is still debate amongst economists, historians, and economic historians as to the effect of the New Deal in America's economic recovery. One survey showed that 49% of economists felt that the New Deal lengthened and deepened the depression, while another showed that only 5% of professional historians and 27% of professional economists felt the same way.
Government spending increased from 8.0% of GNP under Hoover in 1932 to 10.2% of GNP in 1936. While Roosevelt balanced the "regular" budget the emergency budget was funded by debt, which increased from 33.6% of GNP in 1932 to 40.9% in 1936. Deficit spending had been recommended by some economists, most notably John Maynard Keynes in Britain. Roosevelt met Keynes but did not pay attention to his recommendations. After a meeting with Keynes, who kept drawing diagrams, Roosevelt remarked that "He must be a mathematician rather than a political economist."
The extent to which the spending for relief and public works provided a sufficient stimulus to revive the U.S. economy, or whether it harmed the economy, is also debated. If one defines economic health entirely by the gross domestic product, the U.S. had gotten back on track by 1934, and made a full recovery by 1936, but as Roosevelt said, one third of the nation was ill fed, ill-housed and ill-clothed. See Chart 3. GNP was 34% higher in 1936 than 1932, and 58% higher in 1940 on the eve of war. The economy grew 58% from 1932 to 1940 in 8 years of peacetime, and then grew 56% from 1940 to 1945 in 5 years of wartime. However, the unemployment rate never went below 9% before the draft. During the war the economy operated under so many different conditions that comparison is impossible with peacetime, such as massive spending, price controls, bond campaigns, controls over raw materials, prohibitions on new housing and new automobiles, rationing, guaranteed cost-plus profits, subsidized wages, and the draft of 12 million soldiers.
GDP annual pattern and long-term trend, 1920–40, in billions of constant dollars
As Broadus Mitchell summarized, "Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically." Economic indicators show the American economy reached nadir in summer 1932 to February 1933, then began a steady, sharp upward recovery that persisted until 1937. Thus the Federal Reserve Index of Industrial Production hit its low of 52.8 on July 1, 1932 and was practically unchanged at 54.3 on March 1, 1933; however by July 1, 1933, it reached 85.5 (with 1935–39 = 100, and for comparison 2005 = 1,342).
Table 2: Depression Data 1929 1931 1933 1937 1938 1940
Real Gross National Product (GNP) 1 101.4 84.3 68.3 103.9 103.7 113.0
Consumer Price Index 2 122.5 108.7 92.4 102.7 99.4 100.2
Index of Industrial Production 2 109 75 69 112 89 126
Unemployment (% of civilian work force) 3.1 16.1 25.2 13.8 16.5 13.9
1 in 1929 dollars
2 1935–39 = 100
Wartime controls: 1941–1945
The War Production Board coordinated the nation's productive capabilities so that military priorities would be met. Converted consumer-products plants filled many military orders. Automakers built tanks and aircraft, for example, making the United States the "arsenal of democracy." In an effort to prevent rising national income and scarce consumer products to cause inflation, the newly created Office of Price Administration controlled rents on some dwellings, rationed consumer items ranging from sugar to gasoline, and otherwise tried to restrain price increases.
Six million women took jobs in manufacturing and production; most were newly created temporary jobs in munitions. Some were replacing men away in the military. These working women were symbolized by the fictional character of Rosie the Riveter. After the war many women returned to household work as men returned from military service. The nation turned to the suburbs, as a pent-up demand for new housing was finally unleashed.
Postwar prosperity: 1945–1973
Post-World War II economic expansion
This section relies largely or entirely upon a single source. Please help improve this article by introducing appropriate citations to additional sources. (December 2009)
The period from the end of World War II to the early 1970s was a golden era of American capitalism.
The Council of Economic Advisers was established by the Employment Act of 1946 to provide objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues. In its first 7 years the CEA made five technical advances in policy making:
the replacement of a "cyclical model" of the economy by a "growth model,"
the setting of quantitative targets for the economy,
use of the theories of fiscal drag and full-employment budget,
recognition of the need for greater flexibility in taxation, and
replacement of the notion of unemployment as a structural problem by a realization of a low aggregate demand.
In 1949 a dispute broke out between chairman Edwin Nourse and member Leon Keyserling. Nourse believed a choice had to be made between "guns or butter" but Keyserling argued that an expanding economy permitted large defense expenditures without sacrificing an increased standard of living. In 1949 Keyserling gained support from powerful Truman advisers Dean Acheson and Clark Clifford. Nourse resigned as chairman, warning about the dangers of budget deficits and increased funding of "wasteful" defense costs. Keyserling succeeded to the chairmanship and influenced Truman's Fair Deal proposals and the economic sections of National Security Council Resolution 68 that, in April 1950, asserted that the larger armed forces America needed would not affect living standards or risk the "transformation of the free character of our economy."
During the 1953–54 recession, the CEA, headed by Arthur Burns deployed traditional Republican rhetoric. However it supported an activist contracyclical approach that helped to establish Keynesianism as a bipartisan economic policy for the nation. Especially important in formulating the CEA response to the recession—accelerating public works programs, easing credit, and reducing taxes—were Arthur F. Burns and Neil H. Jacoby.
President John F. Kennedy passed the largest tax cut in history upon entering office in 1961. $200 billion in war bonds matured, and the G.I. Bill financed a well-educated work force. The middle class swelled, as did GDP and productivity. The U.S. underwent a kind of golden age of economic growth. This growth was distributed fairly evenly across the economic classes, which some attribute to the strength of labor unions in this period—labor union membership peaked historically in the U.S. during the 1950s, in the midst of this massive economic growth. President Lyndon B. Johnson (1963–69) dreamed of creating a "Great Society", and began many new social programs to that end, such as Medicaid and Medicare. The government financed some of private industry's research and development throughout these decades, most notably ARPANET (which would become the Internet).
Inflation woes: 1970s
In the late 1960s it was apparent to some that this juggernaut of economic growth was slowing down, and it began to become visibly apparent in the early 1970s. The United States grew increasingly dependent on oil importation from OPEC after peaking production in 1970, resulting in oil supply shocks in 1973 and 1979. Stagflation gripped the nation, and the government experimented with wage and price controls under President Nixon. The Bretton Woods Agreement collapsed in 1971–1972, and President Nixon closed the gold window at the Federal Reserve, taking the United States entirely off the gold standard. President Gerald Ford introduced the slogan, "Whip Inflation Now" (WIN). In 1974, productivity shrunk by 1.5%, though this soon recovered. In 1976, Jimmy Carter won the Presidency. Carter would later take much of the blame for the even more turbulent economic times to come, though some say circumstances were outside his control. Inflation continued to climb skyward. Productivity growth was small, when not negative. Interest rates remained high, with the prime reaching 20% in January 1981; Art Buchwald quipped that 1980 would go down in history as the year when it was cheaper to borrow money from the Mafia than the local bank.
Unemployment dropped mostly steadily from 1975 to 1979, although it then began to rise sharply.
This period also saw the increased rise of the environmental and consumer movements, and the government established new regulations and regulatory agencies such as the Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Nuclear Regulatory Commission, and others.
Deregulation and Reaganomics: 1974–1992
The deregulation movement began when Nixon left office and was a bipartisan operation under Ford, Carter and Reagan. Most important were the removals of New Deal regulations from energy, communications, transportation and banking. The hasty removal of some regulations of Savings and Loans while keeping federal insurance led to the Savings and Loan crisis which cost the government an estimated $160 billion.
In 1981, Ronald Reagan introduced Reaganomics. That is, fiscally-expansive economic policies, cutting marginal federal income tax rates by 25%. Inflation dropped dramatically from 13.5% annually in 1980 to just 3% annually in 1983 due to a short recession and the Federal Reserve Chairman Paul Volcker's tighter control of the money supply and interest rates. Real GDP began to grow after contracting in 1980 and 1982. The unemployment rate continued to rise to a peak of 10.8% by late 1982, but dropped to 5.4% unemployment at the end of Reagan's presidency in January 1989. Critics[weasel words] of the Reagan Administration often point to the fact that the gap between those in the upper socioeconomic levels and those in the lower socioeconomic levels increased during Reagan's presidency; they also note that the federal debt spawned by his policies tripled (from $930 billion in 1981 to $2.6 trillion in 1988), reaching record levels. Though debt almost always increased under every president in the latter half of the 20th century, it declined as a percentage of GDP under all Presidents after 1950 and prior to Reagan. In addition to the fiscal deficits, the U.S. started to have large trade deficits. Also it was during his second term that the Tax Reform Act of 1986 was passed. Vice President George H. W. Bush was elected to succeed Reagan in 1988. The early Bush Presidency's economic policies were essentially a continuation of Reagan's policies, but in the early 1990s, Bush went back on a promise and increased taxes in a compromise with Congressional Democrats. He ended his presidency on a moderate note, signing regulatory bills such as the Americans With Disabilities Act, and negotiating the North American Free Trade Agreement. In 1992, Bush and third-party candidate Ross Perot lost to Democrat Bill Clinton.
The advent of deindustrialization in the late 1960s and early 1970s saw income inequality increase dramatically to levels never seen before, but at the same time never before in the U.S.A. could consumers buy so much goods even with the inflations in the 1970s. In 1968, the U.S.' Gini coefficient was 0.386, about equivalent to Japan (.381), though still above that of the United Kingdom (.368) and Canada (.331). However, in the years since, increased free trade, globalization and high corporate taxes have caused U.S. companies to begin to shift their manufacturing and heavy industrial operations to second- and third-world countries with lower labor costs, income inequality in the U.S. has risen dramatically. In 2005, the American Gini coefficient had reached 0.469, similar to that of Malaysia and the Philippines, both at .461, and well-ahead of China (.440). Critics of economic policies favored by Republican and Democratic administrations since the 1960s, particularly those expanding "free trade" and "open markets" say that these policies, though benefiting trading as well as the cost of products in the U.S., could have taken their own on the prosperity of the American middle-class. But in this period, consumers were buying as never before with so many products and goods at such low costs and in high quantities.
This graph shows three major stock indices since 1975. Notice the meteoric rise of the stock market in the 1990s, followed by the collapse of the dot-com bubble in 2000 on the tech-heavy NASDAQ.
During the 1990s, the national debt increased by 75%, GDP rose by 69%, and the stock market as measured by the S&P 500 grew more than three-fold.
From 1994 to 2000 real output increased, inflation was manageable and unemployment dropped to below 5%, resulting in a soaring stock market known as the Dot-com boom. The second half of the 1990s was characterized by well-publicized Initial Public Offerings of High-tech and "dot-com" companies. By 2000, however, it was evident a bubble in stock valuations had occurred, such that beginning in March 2000, the market would give back some 50% to 75% of the growth of the 1990s. The economy worsened in 2001 with output increasing only 0.3% and unemployment and business failures rising substantially, and triggering a recession that is often blamed on the September 11, 2001 Terrorist Attacks.
An additional factor in the fall of the US markets and in investor confidence included numerous corporate scandals. See the wikipedia list of corporate scandals.
Through 2001 to 2007, the red-hot housing market across the United States fueled a false sense of security regarding the strength of the U.S. economy.
Ongoing financial crisis
Further information: Global financial crisis of 2008, Financial crisis of 2007-2008, and Automotive industry crisis of 2008
In 2008 a perfect storm of economic disasters hit the country and indeed the entire world. The most serious began with the collapse of housing bubbles in California and Florida, and the collapse of housing prices and the construction industries. Millions of mortgages (averaging about $200,000 each) had been bundled into securities called collateralized debt obligations that were resold worldwide. Many banks and hedge funds had borrowed hundreds of billions of dollars to buy these securities, which were now "toxic" because their value was unknown and no one wanted to buy them.
A series of the largest banks in the U.S. and Europe collapsed; some went bankrupt, such as Lehman Brothers with $690 billion in assets; others such as the leading insurance company AIG, the leading bank Citigroup, and the two largest mortgage companies were bailed out by the government. Congress voted $700 billion in bailout money and an activist Treasury and Federal Reserve, committed trillions of dollars to shoring up the financial system, but the measures did not reverse the declines. Banks drastically tightened their lending policies, despite infusions of federal money. It became much harder to get car loans, for example. The government for the first time took major ownership positions in the largest banks. The stock market plunged 40%, wiping out tens of trillions of dollars in wealth; housing prices fell 20% nationwide wiping out trillions more. By late 2008 distress was spreading beyond the financial and housing sectors, especially as the "Big Three" of the automobile industry (General Motors, Ford and Chrysler) were on the verge of bankruptcy, and the retail sector showed major weaknesses. Critics of the $700 billion Troubled Assets Relief Program (TARP) expressed anger that much of the TARP money that has been distributed to banks is seemingly unaccounted for, with banks being secretive on the issue.
President Barack Obama signed the American Recovery and Reinvestment Act of 2009 in February 2009; the bill provides $787 billion in stimulus through a combination of spending and tax cuts. The plan is largely based on the Keynesian theory that government spending should offset the fall in private spending during an economic downturn; otherwise the fall in private spending may perpetuate itself and productive resources, such as the labor hours of the unemployed, will be wasted. Critics claim that government spending cannot offset a fall in private spending because government must borrow money from the private sector in order to add money to it. However, most economists do not think such "crowding out" is an issue when interest rates are near zero and the economy is stagnant. Opponents of the stimulus also point to problems of possible future inflation and government debt caused by such a large expenditure.