Chapter 1 A Brief Economic History of the United States

The National Railroad Network The completion of the transcontinental railroads –1850The United States had 10,000 miles of track –1890The 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 20 th century

The Age of the Industrial Capitalist The last quarter of the 19 th century was the age of the industrial capitalist –Carnegie (steel) –Du Pont (chemicals) –McCormick (farm equipment) –Rockefeller (oil) –Swift (meat packing)

Industrial Development By the turn of the 20 th 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

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 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 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 education

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 programs in 1965 that would have profound long-term effects –Medicare –Medicaid –Food stamps

The Sagging Seventies: The Stagflation Decade 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

The Sagging Seventies: The Stagflation Decade (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

The Sagging Seventies: The Stagflation Decade (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

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