National Economics: United States

American economy
Figure 1.--Photographic images are essentially small visual historical documents. Like all historical documents, however, they have to be carefully evaluated. Many modern readers would see the barefoot boys here wearing overalls as a sign of poverty. We have little information about the image, but the fact the boys are wearing ties suggest to us that they are going to church on sunday. We would guess that two families are involved here. Barefeet can suggest poverty, it can also suggest accepted cultural patterns. And look at the overalls. They are not ragged, some kook fairly new. The cars in the background show the photograph was taken in the 1930s. They also reveal something else about these boys--their parents and neighbirs could afford automobiles. While that may not seem to important, it differentistes America from the rest of the world at the time. The United States was the only country in the world where ordinary farmers and workers could afford a car. Henry Ford and mass production made thst possible. Even during the peak of the Depression, many unemployed workers or evicted farm families had cars. In other countries only very sucessful, affluent families had cars, rarely workers or farmers. The political and economic history of the 20th century would in lsrge measure turn on tht stunning fact.

The ecomomy of the modern United States began its development with the European colonization of North America. This included several European countries, but was primarily conducted by the English. At the time the colonization began, neither the British political system or captalism itself had been dully developed. The first two colonies (Jamestown in Massachusetts and Plymouth in Massachusetts) served as prototypes for the two competing economic system that would develop in North and South. Plymouth was founded by religious dissenters influenced by Calvinist theology which had decided views on economic success. The Northern economy developed on the basis of small family farms and handicrafts. British legislation restricted manufacturing. The South developed on the basis of plantation agriculture and slave labor. Unlike the Spanish Empire, they produced little gold and silver, but in the long run generated far greater wealth. Only a few years after the colonies were established, living conditions for average people were higher than in the mother country. And in Britain both the modern English constitution and the capitalist system had evolved by the turn-of-the 18th century. Both were of enormous influence on America. The two differed models of economic developed survived the Revolution and became a dividing line of regional politics in the early years of the Republic. The independent farming and handicraft economy of the north laid the foundation for the industrial revolution. The invention of the cotton gin made possible the expansion of the plantation system in the South. Export earings from cotton helped finance the industrialization of the north. The eventual ecomomic direction of the United States was determined by the Civil War and settled in large measure by the superior capital and industrial resources of the Northern states. After the Civil War, the United States began a rapid period of indusrial expansion which made it the worlds largest industrial power as well as the greatest agricultural producer. The United States developed ever more complex economic and capital institutions to accomodate its industrial expansion. The system was essentially laize faire or ecomonic growth with minimal taxation and government regulation. The Government did promote economic growth in many ways such as land grants to rail road companies. With the rise of the Progressive Movement in the late-19th century, that involvement has expanded.

History

The ecomomy of the modern United States began its development with the European colonization of North America. This included several European countries, but was primarily conducted by the English. At the time the colonization began, neither the British political system or capitalism itself had been fully developed. The first two colonies (Jamestown in Virginia and Plymouth in Massachusetts) served as prototypes for the two competing economic system that would develop in North and South. Plymouth was founded by religious dissenters influenced by Calvinist theology which had decided views on economic success. The Northern economy developed on the basis of small family farms and handicrafts. British legislation restricted manufacturing. The South developed on the basis of plantation agriculture andc slave labor. Unlike the Spanish Empire, they produced little gold and silver, but in the long run generated far greater wealth. Only a few years after the colonies were established, living conditions for average people weee highrr than in the nother country. And in Britain both the modern English constitution and the capitalist system had evolved by the turn-of-the 18th century. Both were of enormous influence on America. The two differed models of economic developed survived the Revolution and became a dividing line of regional politics in the early years of the Republic. The independent farming and handicraft economy of the north layed the foundation for the industrial revolution. The invention of the cotton gin made possible the expansion of the plantation system in the South. Export earings from cotton helped finance the industrialization of the north. The eventual ecomomic direction of the United States was determined by the Civil War and settled in large measure by the superior capital and industrial resources of the Northern states. After the Civil War, the United States began a rapid period of industrial expansion which made it the worlds largest industrial power as well as the greatest agricultural producer. The United States developed ever more complex economic and capital institutions to accomodate its industrial expansion. The system was essentially laize faire or ecomonic growth with mimimal taxation and government regulation. The Government did promote economic growth in many ways such as land grants to rail road compsnies. With the rise of the Progressive Movement in the late-19th century, that involvement has expanded.

Monetary History

The monetary history of the United States, essentiaslly the history of the U.S. dollare is particularly pertinent as monetary policy and the soundness of the dollar is becoming an important political issue. When the United States Continental Congress declared independence from Britain (1776), it meant departing from reliance on the British pound and other British financial institutions. The dollars issued by the Continental Congress steadily declined in value. The Congress printed paper currency denominated in Continental dollars, but had no real taxing authority to support the currency. The phrase "not worth a Continental" expressed that decline. The need for a common currency became obvious, especially after the success of the Revolution (1783). The Articles of Confederation did not grant money powers to the Congress and money became a serious issue. There were a variety of coins (including gold and silver) circulating in the early United States, but it was an inadequate money base for a growing economy. States issued "bills of credit" which served as legal tender, but it was not clear what these paper bills were worth even within a state and trying to figure out what bills from other states were worth was a virtually unsolveable problem. Government at the time given the Revolutionary experience was seen as a threat. Thus for many, limiting the power and size of Governent was seen as the best way of preventing abuse of the public trust. Experience which state bills mase it clear that money had to be precisely defined. Without being so defined it could not play its central role as a meaningful unit of account. Without a precise definition, states could debase money for political reasons or to reduce debts. Thomas Jefferson wrote at the time, "If we determine that a dollar shal be our unit, we must say with precision what a dollar is" (1784). This was one of many questions addressed by the Constitutioinal Congress (1787). The framers in the Constitution limited legal tender coinage to gold and silver. Congress was authorized to coin money and "regulate" its value. Thast meant the value (number of dollars) of the coins issued. Congress was also given the authority to borrow money, but that was a fiscal matter unrelated to monetary (creating money) policy.

Fiscal History

Alexander Hamilton was the first Secretary of the Treasury and his policy of assuming the state debts incured during the Revolution was expensive, but a master stroke in creating a stound fiscal basis for the new Republic. It not only established the good faith and credit of the Federal Government, but it built support for the new Federal Government at a critical point in American history. The Federal Government through the 19th century generally ran a budget surplus, except in time of war. One of President Jackson's proudest bosts was that he payed off the national debt. President Jackson's economic policies, especially the destruction of the Second Bank of the United States, resulted in a serious depression which drove many states into bankruptsy. Tis time Congress failed to bail them out. As a result, many states approved changes to their constitutions to prevent future bankruptsy. A growing economy during peace time was able to pay off the debts incurred during the 19th century wars, even the enormous debt resulting from the Civil War. Both a strong philosophical belief in a balanced budget and the gold standard restrained fiscal imprudence. The Great Depression changed that (1930s). The Depression not oinly forced Britain, America, and other countries off the Gold Standard, but it shifted the populations view of the role of goverment. Beginning with the New Deal, Americans began to see the Government as responsible for their welfare. President Truman was able to pay for most of the Korean War during the War. President Eiusenbhower ran budget surpluses, exceot during the serious 1957-58 recession. Beginning with the Kennedy-Johnson years (1961-69), Federal defecits have been the rule. The Clinton years were an exception. This was followed by substatial defecits during the Bush Years (2001-09) and and the enormous defecits of the Obama presidency (2009- ).

Economic Sectors

The American economy is based on several different sectors. Initially agriculture like all other countries at the time was the principal sector. The agriculural system was varied, especially the difference between North and South. Cotton in America played a major role in finazncing the first stage of the industrial revolution. Througout mostv of the 19th century, agriculture was the backbone of the econmy, only by the late-19th century industry begin to replace agriculture as the heart of the economy. Even so, American agriculture played an important role in the 20th century. Fishing was an early industry and whaling developed in the late-18th century. When the Westward expansion reached the Great Plains, livestock became important. The handicradts of the northeast developed into industrial manufacturing beginning in the early-19th century America developed an important ship building and maritime industry made famous by the China clippers. British limits on American industry was one of the causes of the Revolution. A series of scientific discoveries and technical innovations resulted in the Industrial Revolution in both Europe and America. Many of the innivations came from America. Northern industry was a major factor in the Federal victory in the Civil War. Over the space of the 19th century, America shifted from an aficultural country to an industrial giant. At about the turn of the 20th century, the urban population began to dominate and America became the world's major industrial country. In the 20th century, Henry Ford's assembly line helped increase industrial effidencies that made possible and unparalled level of affluence, importantly including the workers. And the increasing economic power of america, especially american industry gave rise to an important financial sector which would come to rival and evntually excll the British finncial sustem, especially after World War I. And important minimg industries developed in many states. One of the most important was the coal mining industry. Mining was one of the most dangerous industrial jobs. Oil became a part of the mining complex. American began a major change in the world economy in the late-20th century as Space Race technology spawned personal computers, the internet, and what has come to be called the Information Technology of tge Information Age.

Transport

Transport might be considered an economic sector, but it is somewhat destinctive in that it is what ties the economy and all the other sectors together. The primary mode of transport in colonial America was shipping. Trade was primarily with Britain and thus ocean shipping was key. The colonies did not trade to any great extent with each other, but what trade that did take plave was most done by sea. Roads were rudimentary and farmers to get their goods to market relied heavily on rivers if they needed to move any distance. Thus the settlement of tge Eastern United States was primarily done along rivers. Transport was a major obstacle to development. Farmers beyond the Alleganies could not transport corn and other grain any didtance economically. Some coverted corn to whiskey because a higher value product could be trabnsported economically. Amother approach was barges down the Mississippi to New Orleans where ocean shipping was available. The initial answer to transport for the young American Republic was canals. President George Washington promoted a canal from the Potomac over the Alleganies to the Ohio River. It was, however, the Erie Canal that opened the West and in the priocess made New York the capital of American commerce abd eventually the world. A major issue in the early-19th century was internal improvements, including roads and canaks. Canal building was cut short by the railroads which was essentially the industrial revolution in transport. British capital helped finance American rail roads. The rail roads played a key role in the Civil War and opeming of the West beyond the Mississippi. The railroads connected the two coasts and eventually meant that farmers in the most remote locatuons had access to national markets. Henry Ford's Model-T and assembly line provided even further mobility, not only to individuals, but as a result of trucks, to businesses as well. This led to a major effort at road building. After World War II, aviation emerged as a major mode of transport. President Eisenhower impressed by the German Autobahns commened the inter-state highway system. The growth of cities created the need for public transport. Developmebnt was somewhat imoeded by private cars, but increasing attention is now being given to public transport.

Economic Crises

The economic historybof the United States has been narked by a series of booms, inevitably followed by corrections called recessions. The most serious recesssions are called depressions. The earliest recessions are not well documented. The Government at the time did not keep detailed ecomomic records such as unemployment and gross national production. And of course employment in the largely rural economy of the early-19 century had aent meaning than emoloyment today. The terms recession and depression were mot yet used and thus contemprary accounts often did discuss the events in a way that makes it easy for historians and econmists to sketch out the events. Many early recessions resulted from financial and banling panics. As a result, historians disagree as to the number and details (duration and extent) of the recessions that have taken place. There have been roughly 45-50 recessioins and depressions since the ratificatioin of the Federal Constitution (1789). These economic events are caused by fluctuations in business and agricultural cycles, wars, governent policy (regulatory, fiscal, trade and monetary), and the banking industry. President Jackson's desecision to destroy the Bank of the United States resulted in one of the most serious financial crisis of the 19th century. The Panic of 1837 caused a sharp economic decline resulting in wide spread bank failures. Econiomic tranactions were frozen because of lack of faith in paper currency. Bnks stopped payment in specie (gold and silver coinage). Ecomists estimate that iover 600 banks failed. The cotton marke imploded in the South. The result was the Depression of 1839–43. The Panic of 1893 led to another Depression which affected the economy throughout much of the 1890s. American recessions during the 19th century were primarily local matters of national interest. With the growth of the American economy during the 19th century, American fluctuations could have serious consequences in trading partners. The early 20th century was an era of tremendous economic growth. A serious contraction followed World War I, but except in rural areas was of short duration. The Wall Street Crash of 1929 not only led to the Great Depression--a world-wide depression and the greatest economic crisis in history. Many Americans by the 21st century had come to the conclusion that depressions were an phinromenon of the past and that government and industry had the academic and financial ability to prevent anoyther great depression. The 2009-10 financial crisis has proven to be the most severe economic crisis since the Great Depression.

Modern System


Poverty

America often describes itself as the richest country in the world. That is the case when considering the absolute GNP. It is not the case when considering percapita GNP. There are some European countries which have higher percapita GNP levels. The United States is, however, near the top of the list. Measuring poverty in the United states. is a difficult undertaking. Using Government-set poverty levels, there are about 35-45 million poor people in America. The 2008-09 recession has increased the poverty rate. It is to early to tell if some of this increase is structural or if poverty rates will decline significantkly as unemployment levels fall. That wpuld mean that with a population of about 310 million, the poverty rate in America something like 10-15 percent of the population. Statitics suggest that the American poverty rate is higher than that of other comparable developed countries. These statistics have to be treated with some care as they are often based on exchange rate calculations. This often does not address variations in actual purchasing power and thus can be manipulated by authors with an ideological agendas. One of the most disturbing aspects of povery is as many as 20 percent of American kids live below the poverty line. The question of course arises as to what causes poverty. And what is the most effective policies to reduce poverty. The causes of poverty are fairly easy to ascertain, although somewhat controversial. The proper policies to address the problem are even more controversial. Generally speaking, conservatives want government policies to create growth and job creation. Liberals want government programs to expand welfare and redistributive entitlement payments. Interestingly in the 2000s decade, free market capitalism have lifted more people out of poverty in developing countries (Brazil, China, India, Indonesia, and other countries), than any other decade in history, many Americans have become deeply suspious of capitalism and increasingly interested in big-government socialist sollutions.

Income Disparity

One matter of great concern is income equality in Ameriva. Many Americans are concerned tht the gap between the richest Americans and the rest of the population . Extensive press coberage of this issue has pccurred in the media. his was especially the case during the Bush presidency. It has continued in the Obams presidenct, but Ptrsident Onama is rarely ctiticised. In fact it is a trend tht his been occuing for decades across several presidencies. A recent Federal Reserve study has shown deepening U.S. income inequality. Here we need to make the point that income equality is not by itself a bad thing. There needs to be rewards for thise who are especilly talented or work harder. There is nothing wrong with the rich getting richer as long as low income workers also see their incomes rising. In the end average people actually benefit from income inequality. The countries with highestg wages are those countries with substantial income inequality. Income inequality also stimulates innovation. Those countries with the least income equality have tended to be very poor countries which create very little of commetcial value (China before market reforms, Cuba, North Korea, Soviet Unuon, and Viet Nam). That said, it is clear that while income inequality is not by itself a bads, obviously inqiality that seriouslu reduces the earmings of low income workers is an economic negative and negarively affects society. Thus we want to study this issue in some detail. We want tgo know: 1) the actual extent of the disparity, 2) hisytorical levels, 3) recent trends, 4) demographic factors, 5) causes, and finally 6) policy initiatives that could ameliorate or reverse widening inequality. We welcome reader input here, both data and commentary.

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Created: June 28, 2003
Last updated: 12:36 AM 8/15/2017