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Chapter 1
A Brief Economic History of the
United States
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Objectives How we did we grow from a primarily
agriculture nation of 4 million people to anindustrial power of 300 million?
How the Civil War, World War I, and WorldWar II affected our economy
How our nation was shaped by suburbanizationafter World War II
What major factors affected our economic
growth decade by decade from the 1920s intothe new millennium
What the new economy is and how it differsfrom the old economy
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Introduction: A Study in Contrast(The United States)
In the midst of plenty
Expanding
technologies Losing the trade war
22 + million new jobssince 1990-91
Baby boomers betteroff than previousgenerations
Poverty
Dying industries
Won the cold war Thousands of college
graduates looking forjobs in 2002 & 2003
Todays generation isgenerally worse offthan parents
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The Downside of the Worlds
Largest Economy & One of the
Highest Standards of Living The federal budget is at a record high
The US trade deficit is at a record high
The federal government is borrowing $2billion dollars a day from foreigners tofinance the budget & trade deficits
Social Security & Medicare trust funds willrun out of money well before most of youreach retirement age
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The Downside of the Worlds
Largest Economy & One of the
Highest Standards of Living When you graduate, you may not be able to
get a decent job
The savings rate in the United States is
close to zero
The real hourly wage (adjusted for
inflation) of the average worker is lowertoday than it was in 1973
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The American Economy in the
19th Century Agricultural Development
The National Railroad Network
The Age of the Industrial Capitalist
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Agriculture Development
At the start of the American revolution,America had an almost limitless supply of land Nine of ten Americans lived on a farm
One hundred years later, fewer than one in two
Today, fewer than two in one hundred These two feed America and create a huge surplus thathelps to feed the rest of the world
The abundance of land was the most influentialfactor in our economic development in the 19th
century Brought millions of immigrants
Encouraged large families
Encouraged rapid technological development
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Economic Conflicts Leading to
the Civil War
North Benefited from high
protective tariffs
Had an economybased onmanufacturing
Opposed extension ofslavery westward
South Had to pay higher
prices than theywould have paid for
British goods
- Had an economybased on agricultureand slave labor
- Knew this would bepolitically untenable
1-8Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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After the Civil War
New England, the middle Atlantic states,
and the mid-west were poised for major
industrial expansion and experiencedsignificant economic growth
The south remained primarily an
agriculture region and experiencedeconomic doldrums until the early 1960s
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The National Railroad Network
The completion of the transcontinental railroads
1850 The United States had 10,000 miles of track
1890 The United States had 164,000 miles of track
This made possible mass production, mass
marketing, and mass consumption, whichbrought the country together into a huge socialand 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 economicdevelopment well into the 20th century
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The Age of the Industrial Capitalist
The last quarter of the 19th century was
the age of the industrial capitalist
Carnegie (steel)
Du Pont (chemicals)
McCormick (farm equipment)
Rockefeller (oil)Swift (meat packing)
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The American Economy in the
20th Century Until the last quarter of the 19th century,
American economic history was largely
agricultural The beginning of the 20th century
witnessed a shift to manufacturing
By the end of WW I, agriculture played arelatively minor role in our economicdevelopment
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Industrial Development
By the turn of the 20th
centuryAmerica was primarily an industrial
economy Fewer than 4 of 10 people lived on farms
The U.S. was among the world leaders inproduction of steel, coal, steamships, textiles,apparel, chemicals, and agricultural machinery
Americas trade balance was positive
America exported most of her agriculturalsurpluses
America began to export manufacturedgoods
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Americas Population 1789 4 million people
1812 8 million people 1835 16 million people
1858 32 million people
1915 100 million 1968 200 million
2007 Estimate of 300 million
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 1-14
Industrial Development
(Continued)
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Americas large and growing population
was extremely important as a market for
our farmers and manufacturersForeign countries also targeted the
American market
Especially Japan after WW II Japan largely financed its industrial development withAmerican dollars
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Industrial Development
(Continued)
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Industrial Development(Continued)
America was on the way to becoming the
worlds first mass consumption society
Americas development of theautomobile industry was right around
the corner
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Industrial Development(Continued)
Americas first plane would soon be
flying at Kitty Hawk
Commercial aviation was still a few decadesaway
American technological progress made
possible the era of mass consumption and
higher living standards
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The American Economy in the
20th Century The Roaring Twenties
The Great Depression
The New Deal
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The Roaring Twenties
Actually began and ended withdepressions
Early in 1920 the country had a brief
depressionBetween 1921 and 1929 national output rose
by 50 percent and most Americans thought
prosperity would last forever
However the stock market crashed in1929
The Great Depression had arrived
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The Great Depression
Started with the August 1929 recessionHad 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 its present size
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The Recession of 1937-38
An expansion began in March 1933 andlasted until May 1937
Output however did not reach 1929 levels
Seven million people were still unemployed
in 1937A system similar to todays workfare (work
for your welfare check) was put in place About 6 million people were put to work on
public works type projects
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The Recession of 1937-38(Continued)
A lot of credit goes to Franklin D. RooseveltsNew Deal administration for the 1933 1937expansion Banks were reopened
The Government confiscated Americas gold The Securities and Exchange Commission (SEC)
came into being
The Federal Deposit Insurance Commission (FDIC)was set up
An unemployment insurance benefit program wasstarted
The Social Security System was started This was the most significant reform
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What Went Wrong?
The Federal Reserve greatly tightened credit This reduced the money supply
The Roosevelt administration suddenly got theurge to balance the budget This would have made sense during an economic
boom but not when the unemployment rate was12%
This caused Industrial production to fall by 30%
Five million more people to be put out of work
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What Went Wrong?
(Continued)
In April, 1938 the Federal Reserve andthe 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 torecovery
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What Finally Brought the
United States Out of the Great
Depression?
The massive federal government
spending that was needed to prepare forand fight World War II?
This was deficit spending (borrowed money)
In other words the federal budget ran adeficit
1-26Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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 of the worlds
manufacturing output With just 7 percent of the worlds population
The U.S. and the Soviet Union were the only
superpowers left standing
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The End of World War II(Continued)
The U. S. spent tens of billions of dollarsto prop up the economies of WesternEurope and Japan
It spent hundreds of billions more for theirdefense
Since WW II The U.S. has expended 6 percent of
national output on defense
The Soviet Union expended at least 18percent of national output on defensewhich contributed to its collapse in 1990
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The 1940s: World War II and
Peacetime Prosperity WW II required a total national effort
It consumed nearly half of the nations output
It mobilized 12 million men and women The Unemployment rate fell below 2 percent
1939 1944 Output of goods and services doubled
Government spending rose more than 400 percent
Mainly for defense
The economy grew 10 11 percent a year
The government instituted wage and price controls andissued ration coupons for meat, butter, gasoline, and otherstaples
Business and workers strived to produce goods of thehighest quality possible, believing it a prerequisite to win thewar
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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
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1940s and 1950s
One big construction boom
The automobile industry prosperedSupplied Americas pent up demand andbecame the worlds 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 1-32Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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The 1950s: The Eisenhower Years
The advent of television and the KoreanWar stimulated the economy
The Eisenhower administrationEnded the Korean War and inflation
Made no attempt to undo the legacies of theNew Deal
The role of the federal government as amajor economic player became a permanentone
1-33Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Soaring Sixties: The Years of
Kennedy and Johnson
The country was in recession when Kennedywas 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 moneysupply grew
Inflation began and lasted until the mid-80s
1-34Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The Soaring Sixties: The Years of
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The Soaring Sixties: The Years of
Kennedy and Johnson
(Continued) Johnson enacted three spending programs in
1965 that would have profound long-termeffects on the economy
Medicare
Medicaid
Food stamps
1-35Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The Sagging Seventies: The
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The Sagging Seventies: The
Stagflation Decade
(Stagnation + Inflation = Stagflation) Nixon became President in 1968
The decade began with the problemsof inflation and ending the Vietnam
war
Wage and price controls were initiatedFord became President when Nixon
resigned
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The Sagging Seventies: The
Stagflation Decade(Continued)
1973 Economic disaster began
OPEC quadrupled oil pricesThe 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
1-37Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The Sagging Seventies: The
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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 nations productivity growth was at one percent, one
third the postwar rate 1-38Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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 producemore
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 more1-39Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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
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George Bush
Read my lips: no new taxesBush won the election of 1988
Two years later, he agreed to a major taxincrease
Supposedly to reduce the deficit
But, the deficit continued to rise
A recession began in early 1992 and endedlate in 1992
Bush failed in his bid for reelection
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The State of American Agriculture
The story is one of vastly expandingproductivity
1850 to 1900 output doubled
1900 to 1947 output doubled1947 to 1960 output doubled
In 1800, it took370 hours to
produce 100
bushels of wheat.
In 1960, it tookjust 15 hours to
produce 100
bushels of wheat.
In 1820, one
farmer fed 4.5
people. Today
one farmer
feeds 100
people.
1-42Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The State of American Agriculture
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The State of American Agriculture(Continued)
Agriculture is one of the most productive
sectors of our economy
Yet, only 4.5 million people live on farms
today and less than half farm full time
The U.S. exports more than one-third of its
crops
35 million Americans make use of food
pantries and other food distributionprograms
In the Great Depression, Americans resorted to
soup kitchens
1-43Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
The State of American Agriculture
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The State of American Agriculture(Continued)
Despite hundreds of billions of dollars in
government aid (subsidy payments) since WWII
Family farms are disappearing
7 out of 10 are now gone
The average farm has gone from 139 acres to 435 acres
Family farms are being squeezed out by huge
agriculture combines
Today you have to become big to survive!
The Farm Act of 1996 was supposed to reducesubsidy payments and eventually phase them out
Nevertheless, as crop prices sank to 10 and 20 year lows in
1999, subsidy payments to farmers were a record $23
billion
1-44Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Subsidy Payments
In 2002 President Bush signed a 10 year $190billion farm bill that provides the nationslargest farmers with subsidies of $19 billion.
Defenders point out that the European union givesits farmers $60 billion in annual subsidies
To compete in world markets so do we.
Critics contend that subsidies provide farmers with
essentially a guaranteed income so they keepproducing more than the market wants
This keeps prices low and the farmers have to continuallyask the government for more subsidies
1-45Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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The New Economy of the Nineties
It was a decade of major technologicalchange
Marked by low inflation, low unemployment,and rapidly growing productivity
The 1920s and the 1960s could be similarlydescribed
One of the most prosperous decades ever
The stock market soared The length of the economic expansion ended inMarch, 2001 (a period of 120 months) an all-timerecord
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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 clothingto developing countries
Service work like writing software code and processing creditcard 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 Americancounterparts earn
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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
1-48Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Current Issue
Americas Place in History In the early years of the 20th Century the
United States
Emerged as the worlds leading industrialpower
Had the largest economy and the largest
consumer market
Emerged as the worlds greatest military
power
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Tomorrows Concerns
Rising budget deficits
Trade deficits
Concern about
Social Security being there when you retire
Medicare being there when you need it
Will we be able to live as well as our
parents?
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Tomorrows Concerns
In the nineteenth century, the sun never set on theBritish empire The drain of two world wars compelled the British to give up
their empires
By the mid 20th century to the present, Americanmilitary bases do the globe
We have become the worlds policeman, perhaps self-anointed, We are currently involved in Iraq, Afghanistan, A World war
on terror that has come to our shores, and huge problems withsecuring our on borders
Many believe we are overextended and stretched too thin bothmilitarily and economically
This would mean we will have to cut back both militarily andeconomically
The big question is will you be able to live as well asyour parents?
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Weve never been better off,
but can America keep the
party going?
Jonathan Alter, Newsweek,
February 7, 2000
1-52Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Apparently NOT!
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Apparently NOT!
Benjamin Franklin said Aquestion is halfway to
wisdom.
Hopefully your generation can
up with better answers than
that of your parents.