Economic history of the United States

The economic history of the United States has its roots in European settlements in the 16th, 17th, and 18th centuries. The American colonies progressed from marginally successful colonial economies to a small, independent farming economy, which in 1776 became the United States of America. In 230 years the United States grew to a huge, integrated, industrialized economy that makes up over 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 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.

Pre-colonial

While they traded among themselves, Native Americans had little contact outside the Americas before European settlers began arriving. Their economic systems, for example the economy of the Iroquois, involved various combinations of hunting and gathering and agriculture. Native American economies were profoundly altered by the arrival of Europeans and the resulting arrival of disease, influx of European goods, business relations with the Europeans regarding the fur trade, acquisition of firearms, 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, English, Spanish, Portuguese, Dutch, and French explorers sailed from Europe for the New World, looking for gold, riches, religious merit, honor, and glory. But the North American wilderness offered early explorers little glory and less gold, so most did not stay. The people who eventually did settle North America arrived later. In 1607 a small band of settlers built England's first permanent settlement in what was to become the United States at Jamestown, Virginia.

Colonial era

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.

What early colonial prosperity there was resulted from trapping and trading in furs. But 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.

Supportive industries developed as the colonies grew. A variety of specialized sawmills, and gristmills appeared. Colonists established shipyards to build fishing fleets and, in time, trading vessels. They also built small iron forges. By the 18th century, regional patterns of development had become clear: the New England colonies relied on ship-building 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. Because English investors had withdrawn, the field was open to entrepreneurs among the colonists.

By 1770, the North American colonies were ready, both economically and politically, to become part of the emerging self-government movement that had dominated English politics since the time of James I (1603–1625). Disputes developed with England over taxation and other matters; Americans hoped for a modification of English taxes and regulations that would satisfy their demand for more self-government. Few thought the mounting quarrel with the English government would lead to all-out war against the British and to independence for the colonies.

Like the English political turmoil of the 17th and 18th centuries, the American Revolution (1775–1783) was both political and economic, bolstered by an emerging middle class with a rallying cry of "unalienable rights to life, liberty, and property"—a phrase openly borrowed from English philosopher John Locke's Second Treatise on Civil Government (1690). While political separation from England may not have been the majority of colonists' original goal, independence and the creation of a new nation—the United States—was the ultimate result. It was a prosperous time.

New nation

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. He succeeded in building a strong national credit based on a national debt held by the wealthy and political classes (who would then have an interest in keeping the government in healthy condition), and funded by tariffs on imported goods. Hamilton believed the United States should pursue economic growth through diversified shipping, manufacturing, and banking. He proposed measures like protective tariff to pay the costs of government, along with a tax on whiskey that western farmers strongly resented. 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.") As president after Jefferson, James Madison let the bank charter expire in 1811, but the Second Bank of the United States was established in 1816, after the economy took a downslide.

Expansion and growth

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, supported by slave labor, made some families very wealthy.

Millions moved to the more fertile farmland of the Midwest. Government-created national roads and waterways, such as the Cumberland Pike (1818) and the Erie Canal (1825), helped new settlers migrate west and helped move western farm produce to market. The Whig Party supported Clay's American System, which proposed to build internal improvements (roads, canals, harbors) protect industry, and create a strong national bank. The Whig legislation program was blocked by the Democrats, however. President Andrew Jackson (1829–1837) opposed the Second National Bank, which he believed favored the entrenched interests of his enemies. When he was elected for a second term, Jackson opposed renewing the bank's charter, and Congress supported him. 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.

Railroads were, by far, one of the most important contributions to the economy. Many contrasting views exist regarding whether the railroad was "indispensable" or not, but it was undoubtedly very important. The railroad paved the way to new developments in running large-scale business operations, creating a blueprint for future businesses to use. They were first to encounter managerial complexities, labor union issues, and problems of competition. Due to these radical innovations, the railroad became the first large-scale business enterprise. 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. Some people made fortunes overnight, but many people lost their savings. 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

The Industrial Revolution began in north Europe in the late 18th century and quickly spread to the United States by early 19th century.

By mid-19th century, the USA had surpassed Tsarist Russia, revolutionary Prussia and almost matched France and India in purchasing power though sea trade routes were dominated by the Royal Navy's gunboat diplomacy.

By 1860, when Abraham Lincoln was elected president, 16 percent of the U.S. population lived in urban areas, and 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. Many new workers were immigrants. Between 1845 and 1855, some 300,000 European immigrants arrived annually. Most were poor and remained in eastern cities, often at ports of arrival.

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 were speaking hesitantly on slavery, but they were much clearer on economic policy. 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, 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 planter aristocracy of the South disappeared.

The devastation of the South was great and poverty ensued. 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

The rapid economic development following the Civil War laid the groundwork for the modern U.S. industrial economy. By the late 1880's, the USA had overtaken the UK as the world's most powerful economy. [ [http://www.digitalhistory.uh.edu/database/article_display.cfm?HHID=188 Digital History ] ]

An explosion of new discoveries and inventions took place, causing such profound changes that some termed the results a "Second Industrial Revolution." Oil was discovered in western Pennsylvania. Refrigeration railroad cars came into use. The telephone, phonograph, typewriter and electric light were invented. And by the dawn of the 20th century, cars were replacing 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. Large iron mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where these two important raw materials could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories.

As industry grew larger, it developed 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. Also fueling mass production was the increase in efficiency due to the electrification of factories from steam power to electric power. Electric line shafts and electric group drives improved efficiency through reduced energy loss, improved work environment, reduction in fire hazards and ability to reorganize factories into specialized departments. (True mass production was the inspiration of Henry Ford, who in 1913 adopted the moving assembly line, with each worker doing one simple task in the production of automobiles. In what turned out to be a farsighted action, Ford offered a very generous wage—$5 a day—to his workers, enabling many of them to buy the automobiles they made, helping the industry to expand.)

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, perhaps the most flamboyant of the entrepreneurs, operated on a grand scale in both his private and business life. He and his companions gambled, sailed yachts, gave lavish parties, built palatial homes, and bought European art treasures. 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.

Progressive Era: 1890–1920

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.

The American labor movement began with the first significant labor union, the Knights of Labor in 1867. The group helped begin the movement to end child labor, have an eight-hour workday, and use collective bargaining to help improve workers' lots.

A popular movement formed in the agricultural sector at the same time. The Grange movement, also founded in 1867, was a group of farmers who banded together to fight railroad monopolies that hurt grain shipping and to protect other farming interests.

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 also had a big impact on increasing regulation of American business. Upton Sinclair's "The Jungle" (1906) showed America what life was like in 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. While public spending as a percent of GDP had declined during the Taft AdministrationFact|date=April 2007, it began to rise under Wilson's leadership in a trend that would continue for many decades. Wilson created the Federal Reserve, a complex business-government partnership that created the first central bank since 1836. The departure of working men to serve in the armed forces was a significant blow to the workforce, and many women gained employment during the war.

Roaring twenties: 1920–1929

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

The Federal Reserve Board chose to stand by, leaving interest rates high and not shoring up banks, while Congress expanded government in an effort to alleviate the recession. There was a sharp drop in the money supply, which would amount to a one-third reduction by 1933. 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. The U.S. economy plunged into depression. 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.

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. ["Historical Statistics" (1976) series Y457, Y493, F32] 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.

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." [Mitchell p 404] 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). [http://research.stlouisfed.org/fred2/data/INDPRO.txt]

Footnotes

References

"This article contains public domain text from the United States Department of State from" [http://usinfo.state.gov/products/pubs/oecon/chap3.htm State.gov]
* Andreano, Ralph, ed. "The Economic Impact of the Civil War" (1962), articles
* Atack, Jeremy and Peter Passell. "A New Economic View of American History: From Colonial Times to 1940" [http://www.questia.com/PM.qst?a=o&d=101476878 (1994) online] , 1st edition was Lee, Susan Previant, and Peter Passell. "A New Economic View of American History" (1979)
* Carter, Susan B., Scott Sigmund Gartner, Michael R. Haines, and Alan L. Olmstead, eds. "The Historical Statistics of the United States" (Cambridge University Press: 6 vol 2006); online (in Excel format) at some universities. 37,000 data sets make it the standard data source for all topics
* Chandler, Alfred D. "The Visible Hand: The Managerial Revolution in American Business" (1977), business history
* Chandler, Alfred D.; "Strategy and Structure: Chapters in the History of the Industrial Enterprise" [http://www.questia.com/PM.qst?a=o&d=27926559 (1969) online]
* Chandler, Alfred D. and James W. Cortada. "A Nation Transformed by Information: How Information Has Shaped the United States from Colonial Times to the Present" [http://www.questia.com/PM.qst?a=o&d=104506271 (2000) online]
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* Soule, George. "The Prosperity Decade: From War to Depression, 1917–1929" (1947) broad economic history of decade
* Studenski, Paul, and Herman Krooss. "A Financial History of the United States" (1952)
* Taylor, George Rogers. "The Transportation Revolution 1815–1860" (1962) broad economic history of the era
* Temin, Peter. "The Jacksonian Economy" [http://www.questia.com/PM.qst?a=o&d=24211704 (1969) online]
* Walton, Gary M. and Hugh Rockoff. "History of the American Economy with Economic Applications" (2004), textbook
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* Wright, Robert E. and David J. Cowen. "Financial Founding Fathers: The Men Who Made America Rich," University of Chicago Press, 2006. ISBN 0-226-91068-7.

Data

* [http://www.bea.gov/national/index.htm#gdp Bureau of Economic Analysis: Official United States GDP data]
* [http://www.eh.net/hmit/gdp US GDP 1790 to 2005, include GDP, Real GDP, population, GDP per capita, and Real GDP per capita]

ee also

*Great Depression in the United States
*Labor unions in the United States