“An economic look at American History”

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“They must come into, and go through a vast and roaring Wilderness, where they must be bruised with many pressures, humbled under many overbearing difficulties…before they could possess the good Land which abounded with all prosperity, flowed with milk and honey.”

–Reverend Thomas Hooker, 1659.

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Jamestown was founded by a profit-seeking corporation (joint stock company). When gold was not found, other ventures (tobacco in Virginia) began.

Spanish had sent conquistadores & padres for gold, glory, gospel (Mexico). France had sent fur trader to build trading posts (Canada). England had sent men to work for the joint stock companies, or later, families looking for religious freedom (Pilgrims) or a new financial start (James Oglethorpe in Georgia).

Slavery was seen as a “station in life” rather than the abomination it is seen as today. Slavery, via the “Middle Passage” increases greatly after the indentured servants reduce in number after European economy improve and people could afford their own passage over.

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The Puritans & Pilgrims (or Separatists) come to the New World for religious freedom and to build a “city on a hill” where man could worship without interference from Europe. Puritans saw economic success as given by God’s grace, and did business “in the name of God and profit.” Because of the belief in believers being able to read the Bible, the New England colonies had the highest literacy rate.

Lumber, fishing were big industries in New England. Large plantations for cash crops (tobacco, rice, indigo and later- cotton) were in the Chesapeake and Southern colonies.

Triangular trade between England, Africa (Middle Passage) and North America dominated the colonial economy.

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Though the English secured the safety of the 13 colonies through the War of Jenkin’s Ear (Spain) and the French & Indian War (Seven Years War), the colonists had begun to feel independent due to salutary neglect.

To pay for the war, King George III wanted to tax the colonists. The colonists felt this “taxation without representation” was unfair. They also did not like the king’s Declaration of 1763 that used the Appalachian Mountains as a barrier between the colonies and the Indian tribes.

As the American Revolution began, William Pitt (who had won the French & Indian War) told Parliament “You cannot conquer America.”

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The Dutch settle in the New Netherlands (New York) area and were the most market-oriented economy in Europe. They were also the most tolerant in religious matters. They settled on the Hudson River for 40 years before they were driven out by the English.

William Penn (Quakers) and Roger Williams (Rhode Island) were examples of other societies that were set up primarily for religious reasons.

Mercantilism held that gold, silver, & natural resources were the key to riches. Controlling trade through the Navigation Acts allowed the riches to collect in England. The colonies saw themselves as “Englishmen living overseas”.

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Money could only be made in England, and all banks had to be established there. Money is a medium of exchange, a unit of account (or relative value of goods to each other), and a way to hold wealth that’s been accumulated in business.

Inflation is when prices go up while money supplies stay constant. In the New World trade (furs, wampum, iron tools, guns, horses, etc.) became the units of exchange.

Slavery provided the cheapest labor force for these growing farming areas.

Founding Fathers such as Ben Franklin, George Washington, and Thomas Jefferson all grew to view slavery as a divisive issue for America (Franklin started an abolitionist society, while Washington & Jefferson considered freeing their slaves during their lifetimes).

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In the American Revolution, England had the advantage of finances. They had great wealth, the best army, the best navy and money to hire mercenaries (Hessians). The Americans had no national government to help secure money by taxes or loans from Europe. After the Continental Congress was established, the printing press was used to create the “Continental Dollars” for a currency. Individual colonies also printed their own money, and this sudden increase in money supply led to great inflation.

The disadvantage to England was fighting a faraway war (3 months by boat) on unfamiliar soil to its military leaders. Assistance from Tories would be crucial to the war effort.

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General Washington, even with limited resources to pay and equip his troops, knew the key to victory was not an outright military struggle; rather, the colonies had to outwait the English- make it too costly to continue. In essence, make the war too costly to England over time.

“The United States won by not losing.”--John Steel Gordon

The colonies were devastated by the war, especially in its cities. To reduce costs, the American navy was disbanded and the army was greatly reduced. Soldiers returning from the war found their farms in ruin from the war.

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The economy slowly began to recover, but the new nation’s finances did not.

The new government, under the Articles of Confederation did not allow taxation by the national Congress, nor a regulation of trade between the states. The government seemed more like a “United Nations” than a strong national entity.

In 1787, the Articles of Confederation was dropped after Daniel Shay’s rebellion over debts by returning soldiers that were owed on their farms.

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The U.S. Constitution would strengthen the powers of Congress and create a Presidency and a Supreme Court. Congress would also become a bicameral house

Adam Smith wrote The Wealth of Nations (1776) that shifted economic thought from the mercantile system to that of capitalism. With unfettered trade, both internally (states) and externally (international) trade could benefit the economy. Competition in the marketplace led to greater prosperity for all and a stronger country as a whole.

Long-standing monopolies (British East India Company) would no longer be the norm for American business. While it was not perfect (slave issue: 3/5 Compromise), it was the closest any country would get to Adam Smith’s capitalism. Individual self-interest in a marketplace economy would keep the economy strong.

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President Washington’s 1st State Department had 5 employees; the 1st Treasure Department had 40 employees!

Taxes, tariffs on imports, the ability to get loans from other nations, and a monetary system were some of the first challenges of the new government and its newly elected President.

Thomas Jefferson, who would later oppose many of Alexander Hamiliton’s financial plans, did propose the use of coins of smaller denominations that now are central to any nation’s currency. (He would work to kill the bank after his presidency.) Jefferson also proposed a tariff on England that greatly hurt the infant American economy during its 15 months; its unpopularity with the public was the main reason Jefferson did not consider a 3rd term.

Alexander Hamilton, (the main writer (2/3)of The Federalist Papers), wanted an economic system that would both channel the individual pursuit of self-interest and protect the interests of the nation of the whole at the same time.

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Hamilton understood that there was power in managing a country’s national debt, if properly funded and serviced, it could actually add to a nation’s prosperity.

Hamilton argued that old debts had to be paid (and not forgotten or ignored) to keep future investors interested in making loans later. (James Madison argued that speculators would get wealthy from collecting IOU’s from soldiers who sold them cheaply for instant money).

The French Revolution helped to “jump-start” the American economy with trade as exports jumped from $19 million (1790) to $78 million (1807).

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The National Bank was Hamilton’s other contribution. It would be a depository for government funds and transfer from one nation to another. It would also be a source of loans for the national government or other banks. It would also regulate the money supply, as gold or silver (specie) were in short supply.

Thomas Jefferson saw America as a utopia of self-sufficient yeoman farmers did not want such strong national powers; he argued for a “strict interpretation” of the Constitution. Hamilton argued that in a “loose interpretation that Congress could do what it saw as “necessary and proper.”

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“I have…heard much said of the extreme difficulty of ginning cotton…There were a number of respectable gentlemen at Mrs. Katy Greene’s who all agree that if a machine could be invented which would clean the cotton with expedition, it would be a great thing both to the country and the inventor…I involuntarily happened to be thinking on the subject and struck out a plan for a machine in my mind.”—Eli Whitney (1793).

Cotton becomes the leading cash crop of the U.S. and greatly increased the demand for slaves in the South. Steamboats and railroads would also be a result of this industrial revolution in the 1830’s.

Samuel Slater’s factory on the Pawtucket River in Rhode Island turned the cotton into thread & cloth. During the loss of goods from England in the War of 1812, industries in the North did very well. After the war, they wanted a protective tariff to limit goods coming again from England (“Tariff of Abominations” to the South in 1828).

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This “Tariff of Abominations” would lead to the Nullification Crisis (1832) in which South Carolina, led by John C. Calhoun, would call for a state’s right to “nullify” any national law that it disagreed with. President Andrew Jackson quickly squashed that idea.

Henry Clay (along with Daniel Webster) pushed “The American System” that pushed for any improvements in different regions (North, South, West) because it would improve the nation as a whole. Wilderness Road into Kentucky and the Erie Canal in New York were two examples of local improvements that would give national benefits.

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Under President Madison, the Bank of the U.S. did not have its charter renewed. (Ironically, Madison disagreed with his friend, Thomas Jefferson, and wanted to keep the bank, but his ineffective leadership allowed it to die in the Senate).

The War of 1812 starts over the impressment of American sailors by the British navy. The collapse of the national bank the year before greatly hurts the war effort.

After Andrew Jackson’s stunning victory in New Orleans sealed the American victory, President Madison has the bank re-established in 1815. (Henry Clay & John C. Calhoun also now wanted the bank, while Daniel Webster turned against it).

The New President, General Andrew Jackson, did not share in seeing the values of this 2nd National Bank.

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“My vow shall be to play the national debt, to prevent a monied aristocracy from growing up around our administration that must bend its views, and ultimately destroy the liberty of our country.”

(--Andrew Jackson, after being elected in 1828).

Andrew Jackson took on the president of the 2nd National Bank, Nicolas Biddle, in his bid to kill the national bank. Henry Clay tried to get the charter renewed, but Jackson vetoed it, saying it was a monopoly that favored the rich and that it was unconstitutional. (The U.S. Supreme Court disagreed, but Jackson rarely agreed with John Marshall’s court anyway).

To stop land speculation, Jackson declared that he would only take gold or silver (Specie Circular) for land- this after Congress had adjourned for the session. This stopped the economy and led to a deep depression. “The immense fortunes which we have heard so much about in the days of speculation, have melted like the snows before an April sun.” – Philip Hone, former mayor of New York.

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The U.S. government had great debt from the Depression after President Jackson: $64,844,000

Governments can raise money 3 ways: tax, borrow, or print. During the Civil War, both the North & South would revert to all three.

Sec. of the Treasury, Salmon P. Chase & Jay Cooke (Philadelphia banker) came up with the idea of selling war bonds (loans by citizens to its government).

The saving of the Union, (Lincoln’s main objective) truly made us a “united nation” with a truly national focus.

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In the re-building of the nation, a new independence and a variety of resources became the American focus. The “New South” of Henry Grady saw industry coming to the South.

“No society in history had ever needed to govern a highly dynamic industrially based economy in a nation that was constitutionally a federal republic of limited powers. The United States learned how to do so, using, largely unconsciously the great insights of the Founding Fathers: that men are not angels, that they are driven by self-interest, and that that self-interest can be exploited for the general good by an interlocking system of divided powers.” --John Gordon.

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Reconstruction ended with the South using “Jim Crow” laws to keep the newly freedmen from achieving their rights in the 13, 14, and 25 amendments to the U.S. Constitution.

Robber barons such as Cornelius Vanderbilt (RR), Andrew Carnegie (steel), John D. Rockefeller (oil), and J.P. Morgan (finance), gained great wealth during this Industrial Revolution. With weak presidents, Congress allowed these men to build horizontal and vertical monopolies.

Carnegie’s “Gospel of Wealth” argued that the rich should be trusted to use their wealth as a way to improve society.

Great inventors like Thomas Edison, Henry Ford, Orville & Wilbur Wright, Henry Bessemer, and Alexander Graham Bell bring great changes to American society.

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Workers felt victimized and unionized as a way to combat the rich business owners. Samuel Gompers was a leading union organizer.

Socialism and anarchists became movements around Europe (and later to the U.S. during the great immigration waves that came to America to escape the economic depressions.

The Populist movement started to help the economic plight of the Western farmers. Led by William Jennings Bryan (a 4 time presidential candidate), the Populists wanted to change our money to the silver standard. These standards are what gives a nation’s paper money its value: theoretically, you could turn in a dollar bill for a dollar’s worth of gold/silver. By changing to the cheaper silver, inflation occurs, and debts are more easily paid off with money of “inflated value”. So the South & West wanted this change, while the monopolists in the North did not.

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Progressives, who followed the Populists, were the first to propose the income tax, the direct election of U.S. Senators, rural mail service, and the government’s role in protecting consumers.

Under President Teddy Roosevelt, the Progressives responded to Upton Sinclair’s The Jungle by passing the Food & Drug Act and in attempting to break up the trusts (in fact, Taft was a “trust-buster” even more than Teddy).

This push of greater government controls would last until the outbreak of World War I. (Ironically, after WWI, the government would become much less involved EXCEPT for the passage of the Prohibtion Act. This act did not end social drinking, but gave great supplies of money to gangsters like Al Capone & the speakeasies.)

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As late as WWI, the U.S. was the world’s largest debtor nation, with $3.5 billion investments abroad and $7.2 billion European investments in the U.S.

President Woodrow Wilson got the Federal Reserve System passed in 1913 (to finally “fill the gap” left by no national banking system). After WWI, it made its first mistake: it raised the discount rate (the interest rate for loans to banks), which raised the interest rate from 4% to 7% in 8 months. This let a sluggish post-war economy into a recession. (The Federal Reserve basically over-corrected to fight wartime inflation).

The Roaring Twenties and its economic policy of “laissez-faire” allowed the economy to recover quickly, only to see it spiral out of control by the Stock Market Crash of 1929.

America returned to a feeling of isolationism in terms of world affairs.

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The Smoot-Hartley Tariff Act was passed by President Herbert Hoover, which was the highest tariff in American history (by far).

Higher taxes always cause a strain on the economy. It also brings about retaliatory tariffs by foreign nations. This helped lead to the Great Depression, as stock market began to lose profits, speculators began to sell rather than buy, and banks had to close when speculators could not pay their loans.

Government leaders in the 1920’s wanted to keep a balanced budget, rather than do deficit spending to provide economic stimulation. (John Maynard Keynes had this economic theory that became the backbone to FDR’s New Deal).

The Bonus Army, WWI veterans, went to Washington D.C. to demand early payment of their war pension. President Hoover refused, and order Douglass MacArthur to clear out the protestors. When he heard about this, FDR this event would allow him to defeat Hoover.

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“So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” –FDR (March 4, 1932 radio broadcast)

FDR achieves much in his 1st 100 days in office, including a Bank Holiday which would “keep your money safer in a re-opened bank than under your mattress.” The people believed him and the money and gold returned back into the banking system.

FDR passed the Economy Act, the CCC, the Beer-Wine Act, ending the gold standard, the AAA, the TVA, the SSA, and the NIRA.

The president’s personality, swift moves, and unquenchable optimism helped Wall Street have won of its best years in 1933. The GNP grew from $55.6 billion (1933) to $90.5 billion (1937)

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With the outbreak of WWII, the resources needed by Europe helped to energize our national economy from the Great Depression. The U.S. was the “great arsenal for democracy”, said FDR. America would give over $50 billion to Europe in Lend-Lease Aid. Once Japan bombed Pearl Harbor, all thoughts of isolationism died away.

In 1940, the GNP was $99.7 billion. By 1945, it was $211.9 billion. Unemployment became non-existent, as men went to fight and women became “Rosie the Riveters”.

A 2nd Great Migration of African-Americans to the North occurred to cities and increased economic gains for the workers.

In 1944, FDR passed the G.I. Bill of Rights to allow them to go to school; this slowed the number of men returning directly to the work force (which would cause unemployment). This opened up high-level jobs to more people and diversified the elite of America.

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Great population push “Baby Boomers” led to a growth of the suburbs (William Levitt & Levitown) as well as the interstate highway system under President Eisenhower.

Eisenhower warned of the “military-industrial complex”, which is when a nation’s economy can grow during wartime, if a nation is a supplier in a war it’s winning, and it’s fault overseas.

In 1946, the Taft-harley Act was passed. Unlike the Wagner Act, it allowed employers to fully inform their workers on the company’s position regarding the issues in an election to certify a union. It also forbade unions into forcing workers to support its causes.

The Marshall Plan would give $150 billion of economic aid to Europe (1/3), and the rest to Asia, Latin America, etc.

LBJ’s Great Society took on Civil Rights, War on Poverty, and the Vietnam War. This combination strained the economy.

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With the fall of China to communism in 1948, the idea of containment grew: Berlin Airlift, NATO, Korean War, U-2 Incident, Sputnik & NASA, Bay of Pigs, Cuban Missile Crisis, Vietnam, LBJ’s claim that we could afford “guns and butter”, Détente with China & USSR, Nuclear weapons, The “Evil Empire”, “Star Wars” and the collapse of the USSR: these all showed that it was an economic struggle as well as a political one.

1970’s had stagflation (stagnant economy & inflation) due to costs of Cold War and increased prices/ limited supply of oil by OPEC. This led to slow changes by the U.S. auto industry in fuel-efficient cars like the Asian models. Many factories laid off workers or closed, as jobs went overseas in cost-cutting moves.

Republicans, promising small government and taxes while continuing the Cold War led to President Reagan’s “supply-side economics”.

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After the collapse of the Soviet Union, America’s economy rebounded with less money needed for defense. Under President Clinton, a balanced budget was reached again.

After 9/11, spending increased for Homeland Security. Economic struggles in the 21 century and a decrease in world standing, led to President Barack Obama and his commitment to “change” as the choice of the American people in 2008.

The 2012 election will probably hinge on the state of the economy at the time of the vote. If things are going well in “money matters”, President Obama will probably get a 2nd term. If it’s not, he may be denied that 2nd term for economic reasons like Carter (1980) and Bush, Sr. (1992) found out.

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