Evolution of the Economy
The U.S. economy has changed beyond recognition over two centuries, but some features endure: a vigorously competitive marketplace, spurts of invention and innovation, political swings between more government regulation and less, between higher protective tariffs or other barriers and freer trade.
Spanning much of the territory between two great oceans, the United States is blessed with tremendous natural resources: a treasure of forests, seacoasts, arable land, rivers, lakes and rich mineral deposits.
At the time of U.S. independence, the economy depended heavily on exports of those resources and imports of many other basic and finished products. Then, in the era of rapid industrialization and a growing internal market after the Civil War, it became less dependent on trade. Since the end of World War II, exports and imports have played a more important role again.
When George Washington took office as the first president of the United States in 1789, eight out of 10 Americans lived on farms, mostly just feeding themselves, and the largest U.S. city, New York, had only 22,000 residents.
During Washington's eight years in office, two rival political factions emerged. Their ideas have influenced U.S. economic debates ever since.
One faction was led by Thomas Jefferson, a Virginia planter and principal drafter of the Declaration of Independence. That group wanted the United States to remain an agrarian society with minimal government intrusion.
The other faction was led by Alexander Hamilton, one of General Washington's top aides in the Revolutionary War against Great Britain. His group sought a strong federal government to promote U.S. manufacturing through government support of infrastructure improvements, protective tariffs on imports, a strong currency and central banking.
The Constitution of the United States, ratified in 1788, outlines the federal government's role in the economy. At Hamilton's insistence, it gives the federal government and not the individual states the power to issue money. Hamilton's objective was to create a strong national currency for a creditworthy economy.
The federal government also received the sole power to grant patents and copyrights to protect the rights of inventors and writers.
The Constitution prohibits tariffs on goods moving between states. It gives the federal government sole power to regulate this interstate commerce and to impose tariffs on foreign imports. The first Congress in 1789 imposed the first U.S. tariffs to raise revenue and to protect U.S. manufacturers of glass, pottery and other goods.
Tariffs became a longstanding, divisive regional issue. Manufacturers and financiers in northern cities favored tariffs to raise the prices of goods from overseas. The mostly rural southerners opposed tariffs, which raised prices of goods they imported from Europe and led Europeans to retaliate by reducing imports of commodities from the U.S. South.
People in newly added western states were divided over tariffs. They disliked the higher prices on imports, but they liked the government revenue that paid for canals, roads and railroads.
By far the most divisive regional issue was slavery. Northern states, with economies grounded in industrial manufacturing, had over time abolished slavery, but the South's wealthy planters depended on African-American slaves to harvest tobacco, sugar, hemp, and, above all, cotton. Low-cost cotton provided raw material for textile manufacturers in the U.S. North and Great Britain.
Slavery worsened regional tensions. In 1861, 11 southern states seceded from the United States and created the Confederate States of America. The U.S. Civil War (1861-1865) ended slavery in the United States, and it led to many more changes.
In the absence of opposition from southern legislators, the war-time Congress expanded the power of the federal government, passing the first national tax system, issuing a national paper currency, paying for public land-grant colleges and starting construction of the first transcontinental railroad.
After the war, the agriculture economy of the defeated South moved from a plantation system to one of tenant farming. Former African-American slaves and rural whites lived in poverty for most of a century afterward.
The industrial and commercial economy of the victorious North, meanwhile, continued its great expansion. The first railroad linking the Atlantic and Pacific coasts, completed in 1869, enabled a true national economy to develop, one capable of trading on equal terms with Europe and Asia. "The American economy after the Civil War was driven by the expansion of the railroads," historian Louis Menand wrote.
Throughout the 19th century, American inventors were transforming how Americans worked. Before the Civil War, inventions - such as Eli Whitney's cotton gin, John Deere's steel plow and Cyrus McCormick's mechanized grain reaper - were already improving farm productivity. In the decades after the war, steam tractors, gang plows, hybrid maize, refrigerated railroad freight cars, and barbed wire fencing to enclose rangelands all appeared. From 1800 to 1890, the typical time required for a farmer to produce 100 bushels of wheat plunged from about 300 hours to roughly 50.
By the 1880s U.S. manufacturing and commercial output surpassed farm output in value. With European financial backing, new industries and railroad lines proliferated, attracting immigrant labor to the North's sprawling cities.
The 19th century delivered other startling U.S. inventions and innovations, including Samuel Morse's telegraph, Alexander Graham Bell's telephone and Thomas Edison's light bulb and phonograph, and systems for distributing electric power to homes and businesses. By the early 20th century, electric power surged throughout the U.S. economy, powering factories, promoting automated manufacturing, lighting offices and homes, illuminating department stores and movie theaters, lifting elevators in skyscrapers and powering city streetcars and subways.
The new industrial economy did not make all Americans prosperous. Debt-ridden farmers in the South and West were battered by tight credit and falling commodity prices. Severe economic recessions wracked workers and businesses in the 1870s and again in the 1890s.
The changes wrought by industrialization and urbanization changed the country. Organized labor unions sprang up. In the 1890s a short-lived Populist political party, focusing anger at wealthy financiers and industrialists, demanded lower interest rates on loans and inflationary monetary policy to let debtors repay their debts with less valuable dollars.
In the early 20th century, a political movement called Progressivism found adherents among both major political parties, Democrats and Republicans alike. The Progressive movement reflected a growing sense among Americans that, as historian Carl Degler wrote, "the community and its inhabitants no longer controlled their own fate."
Progressives used government power to represent common people against the interests of powerful industrialists and financiers. President Theodore Roosevelt, a Republican, vigorously enforced antitrust law to break up concentrations of economic power in railroads, oil, beef and tobacco. President Woodrow Wilson, a Democrat, strengthened the antitrust laws and started collecting income taxes from corporations and wealthy individuals. In 1913, Wilson also acted to create the Federal Reserve, the first U.S. central bank chartered since the 1830s.
The 1920s saw strong U.S. economic expansion and prosperity for many Americans but also increasing speculation in the stock market. The decade ended with a stock market crash and the onset of the Great Depression. Prices collapsed, impoverishing farms, businesses and families. About 40 percent of U.S. banks failed and many depositors lost their savings.
The United States imposed punitive tariffs on imports, and its trading partners retaliated in kind, spreading the economic contraction around the world. The U.S. unemployment rate approached 25 percent. These hardest economic times created years of anxiety.
The 1932 election of President Franklin D. Roosevelt and a Congress dominated by his fellow Democrats enabled passage of a "New Deal" economic program. "The only thing we have to fear is fear itself," Roosevelt assured Americans in his inauguration speech. On taking office, Roosevelt temporarily shut down all banks and a few days later allowed reopening of the solvent ones strong enough to survive, effectively ending the runs on banks.
An improviser and pragmatist more than an ideologue, Roosevelt launched many programs aimed at halting the banking crisis, creating government jobs for the unemployed and raising farm prices by reducing output. Most of these initiatives lasted only a few years; debate over their effectiveness continues today.
Other New Deal initiatives have continued to the present: a minimum wage law, the Social Security retirement pension system, regulations on banks and the stock market, and limited government insurance against losses on consumer bank deposits.
Roosevelt injected the federal government into economic activities previously deemed the domain of the private sector. A controversial example was creation in 1933 of the Tennessee Valley Authority, a federally charted corporation formed to control flooding and generate electric power in an impoverished region of the South.
Strong, lasting economic recovery finally came about as American industry mobilized to support the United States' entry into World War II in December 1941. Factories supplied war materiel to U.S. and Allied armed forces in both the European and Pacific theaters. The U.S. auto industry ceased producing private vehicles and produced tanks instead, 30,000 during 1943 alone.
At war's end, with much of Europe and Asia in ruins, the United States stood alone as the world's greatest economic power. But American policymakers understood that one key to long-term prosperity was a world in which the economies of other nations prospered and grew. U.S. influence led to the creation in 1944 of the International Monetary Fund and World Bank to promote a balanced global financial system. The world's wealthiest countries subsequently negotiated a General Agreement on Tariffs and Trade for reducing import tariffs. The World Trade Organization succeeded the GATT in 1995.
After World War II, international trade and finance became ever more crucial to the U.S. economy. By the 1950s the value of farm and factory output was surpassed by the output of services such as wholesale and retail trade, finance, real estate, health, law, and education. In 2009 the United States ranked first in imports and third in exports, first in direct investment in foreign countries and first in direct investment by foreign countries.
From World War II until 2007, Americans experienced periods of unprecedented economic expansion and prosperity, propelled in part by the 76 million Americans born in the 1946-1964 "baby boom." The recessions that did occur in the postwar years until 2000 were relatively short and did relatively less harm to Americans' lives than the depressions of previous eras.
In 1965 President Lyndon Johnson pressed Congress to expand sharply the social safety net by passing Medicare and Medicaid government health insurance programs for the old and poor. Congress also adopted a raft of other programs, many of them short-lived, intended to eliminate poverty by improving education and housing.
An inflationary spiral began during the Johnson administration and got worse through the 1970s. During that time President Richard Nixon had briefly imposed government wage and price controls in a failed attempt to arrest inflation. Oil shocks to the U.S. economy following the 1973 Arab-Israeli War and 1979 Islamic revolution in Iran contributed to stagnant economic performance. The inflationary spiral did not end until the U.S. Federal Reserve raised interest rates sharply in 1981-1982, causing a recession.
Tax cuts and business deregulation pursued by President Ronald Reagan in the 1980s marked resumption of robust economic expansion and a long rise in stock prices. Those policies also marked, however, the start of a long climb in federal government debt. This period also saw a widening income gap between the wealthiest Americans and the rest of the populace.
California-based entrepreneurs introduced transformative computer technologies. These sparked new domestic and international consumer markets, and invigorated the U.S. economy. The raw material for semiconductors gave the California center of computing innovation the name Silicon Valley.
The 1990s (not unlike the 1920s) saw strong economic expansion, increased prosperity and stock market speculation. When the resulting "dot com" bubble burst in 2000, the stock market crashed and the economy went through a short recession.
In the first decade of the 21st century, the United States engaged in costly wars in Afghanistan and Iraq. Meanwhile, the cost of providing Americans with health care increased sharply at great cost to federal, state, and local governments. Federal government debt, already $3.4 trillion in 2000, was approaching $14 trillion in 2011, an increasing proportion of it owed to foreigners.
Following the dot-com recession, another speculative bubble arose, this one fueled by sustained low interest rates, which distorted the U.S. real estate and home mortgage market. The overbuilt housing market crashed in 2007, followed in 2008 by a financial crisis that spread to much of the world. For the first time since the Great Depression, U.S. unemployment soared to 10 percent in 2009, slipping only to 8.8 percent by March 2011.
The governments of the United States and other developed countries took extraordinary measures to combat the crisis. Interest rates were lowered close to zero, and more money was borrowed to support economic stimulus projects and to prop up ailing banks and major industries. The theory was to spend as necessary to forestall another Great Depression and to repay creditors once economic growth had been restored. The recession officially dated from December 2007 to June 2009, but high unemployment persisted in the slow economic recovery.
Nevertheless, the U.S. economy remained the largest in the world, and the share of economic output per person remained the highest among the G-20 major economies. Both statistics testify to the resilience of the U.S. economy, and its ability to remain productive even during comparatively hard times.
(This is a product of the Bureau of International Information Programs, U.S. Department of State.)
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