Tài liệu Growth and Decline of the Economies of Europe and the US docx

DedicationThis book is dedicated to students and teachers of economics in the developed world.May God give them the wisdom to find an alternative to neo-liberal capitalism and save the w

Growth and Decline of the Economies

of Europe and the US

Published by Bhaskar Sarkar, at Smashwords

Cover art: Sarita Sharma

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Copyright Author Bhaskar Sarkar 2012

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DedicationThis book is dedicated to students and teachers of economics in the developed world.May God give them the wisdom to find an alternative to neo-liberal capitalism and save

the world

Contents

Prologue

Chapter 1: Economy and Wealth of Nations

Chapter 2: Economic Growth and Decline of Europe

Chapter 3: Economic Growth and Decline of United States

Chapter 4: Impoverishing Nations

Chapter 5: Impoverishing the People

Chapter 6: Bonanza for the Rich

Chapter 7: Causes for the Decline

Chapter 8: Strategy for the Future

Epilogue

Bibliography

About The Author

Prologue

“ You don’t need an economist or the Federal Reserve to tell the American people that

the economy is in trouble because they have been experiencing it for years now We have to stop giving tax breaks to companies that are shipping jobs overseas and invest those tax breaks in companies that are investing in the US,”- Barack Obama, American

Democrat President in waiting at a debate at University of Texas, Austin on Thursday 21 February 2008

About four years have passed since Barack Obama became the President of United States But the world economic situation is still grim The decline in the economies of the United States and much of Europe is not a figment of the imagination of the Author Government debts are soaring GDP growth is stagnating Unemployment is stubbornly refusing to comedown Poverty and inequality levels are rising Goldman Sachs is now predicting that the largest developing economies namely Brazil, Russia, India and China also known as the BRIC will overtake G7, the seven largest economies of the developed world, in size of their economy (Briefings; Time Magazine April 4, 2011) Fareed Zakaria, the well known author, TV anchor and correspondent has written the book, “The Post-American World”

On September 15, 2008, ahead of the collapse of the over 150 year old investment bank, Lehman Brothers, Alan Greenspan, the head of the Federal Reserve admitted that the US economy was facing its worst crisis in a century A 2008 report by the Federal Reserve showed that household net wealth in the United States fell for the first time in five years

in the fourth quarter of 2007, dropping $532.9 billion or 3.6 percent, The collapse of real estate prices accounted for a third of the decline, while the decline in value of financial assets like stocks, bonds and mutual fund investments accounted for nearly half By October 2008, with the stock market loosing 20% in one week, with stock prices

hovering at about half their 2007 peaks, after 23 banks and some Fortune 500 companies having gone bankrupt, everyone was ready to admit that there was a crisis in the US economy Today, in the second half of 2011, the economic situation in the United States and Western Europe is as grim if not grimmer

But it was not always so The 1950s and 1960s was characterized by great economic prosperity in the United States Economic growth was high and inflation was contained Distribution of wealth was reasonably fair and the rich poor divide was not as much as it

is today There was a substantial and prosperous middle class Then 1973 and the years that followed brought in a variety of fiscal problems The US dollar weakened and the US had to leave the “Gold Standard” There was an oil crisis in 1973 and energy crisis in

1979 There was increased accumulation of capital in the US Unemployment began to rise Inflation or stagflation was increasing A number of theories concerning new

economic systems began to develop There was extensive debate between those who advocated “social democracy and central planning” and those recommending “liberating corporate and business power and re-establishing market freedoms” By 1980, the pro corporate group had emerged the winner The global economic system that they created would become known as “neo-liberalism”

The other day I was listening to a program on CNN on the US Economy The anchor was very clear that when US government and politicians discussed the US economy, they tended to approach the problem from statistical approach rather than a peoples approach Thus measures which benefit the super rich and the American companies or which

projected a rosier statistical picture, rather than those which benefited the American people are usually given more weight age No one seems to be clear as to why the

economies are not reviving The debate in the Congress is limited to reducing deficit and perpetuating the “Bush Tax Cuts” and increasing stimulus to create employment and increase tax on the rich The debate in the academic world does not seem to cover any new ideas Every one seems to recommend more of neo-liberal capitalism and

globalization with minor differences

This book seeks to examine some historical facts regarding the rise of the economic power of Western Europe and the United States and the causes of the decline of the economic power It is also an appeal to the professional economists and academicians to halt the march of neo-liberal capitalism and globalization unleashed by President Ronald Regan in 1981 and followed by all his successors to date with disastrous results for the

US and the developed world These economic doctrines, which impoverish the majority

of the people of the developed world while benefiting the American companies and the super rich, are economic policies which will finally end peace and prosperity in the US, Britain, Europe, and this world The fact that the British Economy is at a 60 year low is

no coincidence British Prime Minister Mrs Margaret Thatcher, a contemporary and confidante of Ronald Regan, introduced the same economic liberalization in UK at about the same time

The book is also an appeal to the professional economists and academicians to

re-examine the forgotten economic theory of “Mercantilism” and see if it can revive the fortunes of the United States and the developed world It is also an appeal to the

economists of the developed world to find an alternative to neo-liberal capitalism and globalization which are impoverishing the governments and ordinary people of the

developed world

The Author

Back to Contents

Chapter 1: Economy and Wealth of Nations

“I would like to read what John McCain has to say about honor Both my husband and I

have been laid off and we cannot afford to buy his book to find out” - Zulia Zulich,

Rancho Cucamonga, California, US, In Box, Time Magazine, September 29, 2008

Before we discuss the rise and fall of the economies of the developed world and how the economies can be revived, it may be appropriate to spend a few minutes to define the meaning of the economy of a nation and its wealth Is the economy of a nation a set of impersonal statistics like GDP, GDP growth, per capita GDP, consumer confidence or Dow Jones index? Or does the economy and wealth of a nation mean the ability of the government to spend money to wage war and to provide aid to other countries or protect greedy investors and bailout the private sector banks and financial institutions which are

on the verge of collapse? Or does it mean the prosperity of the limited companies and business houses of the nation, their assets and profitability or the wealth and prosperity of the super rich or the upper class of the world that are getting wealthier by the minute? Or does it mean the wealth, well being and prosperity of majority of the people of the

nation?

If the economies of nations mean the ability of the national governments of the developed nations to spend, the economies are perhaps fine Governments can borrow or print as much money as they want The developed countries have been doing just that since 2000 and funding wars in Iraq and Afghanistan and providing assistance to favored countries like Israel, Pakistan, Ethiopia, and Georgia to name a few and running up huge trade and budget deficits These Governments can also spend trillions of dollars of taxpayer’s money to bail out banks and investment banks which are going bust because of their greedy and unsound credit and investment policies which the governments failed to regulate If the economy means the prosperity of nations multinational companies and the super rich, then they are doing better They have been able to stash over a trillion dollar

of profit offshore at tax havens to avoid paying their legitimate share of taxes There is no doubt that a few Wall Street icons, over 100 year old Fortune 500 companies, may have collapsed But that has happened before in 1979, 1982/83, 1988, 2000/03 and 2008 The super rich are doing fine The world had 1210 billionaires in 2011, an increase of about

200 over 2010 Of the 1210, 713 were from United States and Europe and 330 is Asia But if by the economy of nations we mean the economic condition of majority of the people, it is bad and getting worse by the day every year since 2000 Unemployment is increasing and is at unprecedented levels in Western Europe Poverty is increasing Savings of many thrifty and prudent citizens have disappeared with the collapsing

financial giants Most sixty plus citizens of the developed world are resigned to defer

retirement as much of their retirement plans have gone sour and are resigned to a life of penury after retirement.

Economy

An economy is defined as the total of all human activity including producing,

exchanging, distributing, and consuming goods and services inside an economic system The economy of a country consists of all economic activity in its economic system An economy may also be described as a social network where goods and services are

provided or exchanged according to demand and supply between participants by barter or

on payment with currency accepted within the network A given economy is the end result of a process that involves its technological developments, history, social

organizations as well as its geography, endowment of natural resources and ecology

An economic system is composed of people and institutions It is governed by rules, and relationships between the people and the institutions Laws regarding sale, lease or

mortgaging property are example of rules The organizations like central governments, state governments, central banks, banks, stock exchanges, courts, corporations etc are examples of institutions Relationships include the relations between the employee and employer, banks and their creditors and debtors, corporations and governments and the vender and the consumer etc

The people of the country may be divided into classes Adam Smith divided the

population into owners of resources (labour, land and capital) and labour Another way of dividing the population could be by income Thus we have the rich, the middle class and the poor One percent of the worlds wealthiest have 40 percent of the world’s wealth Another way of dividing the population is to classify them as the privileged and under privileged The wealthy are naturally privileged The privileged also include politicians, senior officers of public and private institutions and well educated professionals The poor are naturally under privileged The under privileged also include ethnic and

religious minorities, immigrants, refugees etc

Institutions can be public or private Public institutions are created by governments to provide essential services, maintain law and order and to protect the country from

external threat Public institutions like hospitals or schools are set up and run with public money or taxes paid by the taxpayers They may charge fees for services provided and partly or fully fund their activities Private institutions like manufacturing units, banks, hospitals, and hotels on the other hand are set up by owners of resources Their primary focus is to generate more and more profit and wealth for the owners and share holders

Wealth of Nations

What constitutes wealth of nations? Unfortunately, there is no universally accepted definition of wealth of nations To a lay man, individual wealth consists of money (cash), valuable possessions like gold, gems and jewelry, land and buildings, and stocks, shares, bonds, debt and other modern investments In case of nations, wealth is more difficult to

define Some may include the wealth of its people, its institutions, foreign exchange reserves etc Some may like to add its natural and manpower resources Some may restrict it to the wealth of its central government The wealth of nations or individuals is constantly changing However, it is interesting to note the various nuances of wealth.

Cash or Legal Tender

The first and foremost part of the wealth of a nation is its cash All countries have printed

or issued a certain amount of currency and coins Most of it is held within the country but some of it may be held outside the country as foreign exchange reserves The total money

in any economy is held at different places

Cash is that amount of currency that is physically available with individuals and

institutions and not deposited in any bank In developing countries like India where parts

of rural population do not have access to banks, cash constitutes a larger percentage of the total currency in the economy Cash is used for day to day expenditure Cash is also used for smuggling, trading in narcotics, bribing, funding political parties etc Cash is also used in transactions to avoid paying VAT and other taxes

Money is also held with central banks of countries Money is held with banks in the form

of savings or demand (current) deposits This money can be withdrawn from the bank at short notice Money is also held as Term Deposits or fixed deposits where the money is locked in for a specified period

Money is essential for survival It enables us to buy goods and services that we need or that we want When we have more money than what we need and want, we have an investable surplus Thus capital is formed This capital can remain deposited in banks or

be used for producing goods and services or for speculation When it is used for

producing goods and services, we generate employment and profits When capital is used gainfully for speculation, it does not generate employment but more capital When there

is more capital than what can be invested in goods and services we have a serious

problem When we have too much money chasing too few goods and services, we have inflation When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property, commodities etc, we have bubbles When these bubbles burst, there is a financial meltdown

A dollar currency note or coin remains a dollar over the years But its purchasing power

is always changing Most of the time, the purchasing power of money within a country keeps reducing due to rise in prices of goods and services or inflation To compensate for the rise in the cost of goods and services, incomes have to be increased

When money is used for purchasing goods and services from outside the country, an exchange rate comes into play to convert the currencies of the importer and exporter countries The purchasing power of a currency may increase in a foreign country if the currency of the foreign country is devalued The converse is also true Exchange rate of currencies is one of the reasons for the so called wealth of developed nations One US

dollar is equal to about 55 Indian Rupee or 6.39 Chinese Yuan The exchange rates are constantly changing There is no mathematical logic behind these figures The exchange rate is supposed to be determined by demand and supply However, in many countries like India and China, the exchange rate is totally or partially fixed by the government to suit its trading requirements To illustrate the point let us compare the GDP of United States and China The GDP of the United States in 2010 was about 14.6 trillion dollars

US The GDP of China in 2010 was 5.87 trillion dollar US Thus if China changed its conversion rate from 6.39 Yuan per dollar to 2 Yuan per dollar, it would immediately become the largest economy in the world

Gold, Precious Metals and Stones

The second part of the wealth of a nation is gold and precious stones and precious metals Their value tends to constantly rise over the years In 1971 the price of one oz of gold was US $40 In September 2011 it rose to over US $ 1900, an over 47 times increase in

40 years The prices of gems and other precious metals have also been increasing though the increase is not uniform or comparable with gold

Land and Property

The third part of wealth comprises of land and property Price of land has been increasing all over the world There may be short term fall in prices of land after financial

meltdowns but the prices rebound within 10-15 years In rare cases, specific portions of land may see a reduction in value due to ecological degradation or political unrest

However, the cost of the building itself usually reduces due to aging or due to damage in natural disasters

Stocks, shares and other financial instruments

The fourth part of wealth is stocks, shares and other financial instrument Their value is always fluctuating and unreal They have a face value, a book value and a market value

It is this so called market value that is used to calculate the value of ones holding of stocks, shares and other financial instrument at any given time The market value changes

by the minute When the markets crashed in 2008, the total value of the stocks reportedly fell by about 35 trillion US dollars Stocks, bonds and other financial investment

instruments can become junk or valueless if the company or bank collapses or is declared bankrupt It will thus be seen that wealth represented by stocks, shares and other financial instruments are unreal The “market capitalization” figure or the value of all stock of companies listed in a stock exchange is a meaningless figure The sum can never be realized because stocks and shares are converted to real money only when they are sold and any large sale reduces the price

Other Resources

Some like to include natural resources like deposits of coal, crude oil, natural gas, metals, precious metal and gems, hydro-electric power generation potential etc into the wealth of

nations Some would want to include manpower resources or technological excellence in wealth of nations Some may want to include tourist earning potential into wealth of nations But the value of these resources is difficult to quantify and best ignored while assessing the wealth of a nation.

Holders of the Wealth of Nations

Wealth of nations are held by four entities, the Central Government, Governments of its states/counties/provinces, its institutions, and its people

Central Governments

The wealth of Central Governments consist of money collected as taxes, its reserves of domestic money and precious metal held with its central bank, money given as loan to foreign governments, money invested in bonds of foreign countries and foreign

exchange reserves The financial state of the central governments of developed countries

is poor Their government debts are huge and range from about 70 to 200 percent of GDP

Governments of States /Counties/Province

The wealth of Governments of States/Counties/Province consist of lands and property in its possession, money collected in taxes and money received as grant from the central government and deposited in banks or state treasuries Finances of most of these

governments are usually in dire state

Measuring Economy

How do we measure the size of an economy? Do we measure it by its GDP, by the level

of Public Debt, by the exchange rate of its currency, the current account deficit, the trade deficit, stock market performance, industrial output, agricultural output, the number of

billionaires they have, the real income of the people, the unemployment levels, the

poverty levels or levels of economic disparity The assessment will naturally depend on the yardstick used The most common method used is to measure the countries GDP in

US dollars (PPP) The figures are calculated annually by World Bank and a few other organizations The measurement by GDP has serious shortcoming which we will discuss

in Chapter 4

Measuring Wealth of Nations

Measuring the wealth of nations is equally problematic Most countries do not declare the total currency that is in circulation in the economy The gold and foreign currency

reserves of countries may be in public domain but there is no way of knowing the

quantity and value of gold, silver, gems and jewelry held by the people of a nation Comparing wealth of nations involves use of currency conversion rates which are often manipulated to suit the requirements of the governments, World Bank or IMF

Conclusion

It is the author’s opinion that much of the economic crisis that seems to engulf the United States and Europe is because we are so much taken in by economic theories and so busy manipulating economic policies and activities to suit different interest groups that we seem to forget the basics Some thoughts which the learned readers may like to ponder on are:

Real wealth consists of money (currency and coins), land, gold, silver, gems etc Like matter, real wealth cannot be destroyed It only moves from one individual, institution or country to another Unreal wealth in the form of shares, bonds, derivatives and other financial instruments, on the other hand, can loose its value overnight during stock market crashes and financial meltdowns.

Demand at any given time is finite If one American consumes one kg of meat a day, the total monthly requirement for a population of 300 million will not exceed 9 billion kg If more is available in the market, some of it will remain unsold The same is true for all goods and services.

When there is more capital in an economy than what can be used to purchase or invest in goods and services we have a serious problem When we have too much money chasing too few goods and services, we have inflation When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property etc, we have bubbles When these bubbles burst, there is a financial meltdown Excessive

liquidity or money supply is a greater threat to the stability and wellbeing of mankind than nuclear weapons, pandemics and terrorism because it puts necessities of life,

particularly food and housing beyond the reach of the poor and the underprivileged These people constitute 60 to 80 percent of the population of countries This is bound to lead to social unrest in the long run.

The value of wealth of nations, institutions and individuals are constantly changing If you do not know how to hold on to real wealth, it will move to some other country,

institution or individual.

Back to Contents

Chapter 2: Economic Growth and Decline of Europe

It is generally accepted that at the beginning of the 18th Century, the level of prosperity in the nations of Asia and Europe was more or less the same But by 1950, the situation had completely changed Per capita income of the people of Western Europe was 20 to 30 times that of countries of Asia and Africa It is thus natural for intellectuals, economists and even the people of the developed world to claim that these countries became wealthy due to their superior innovativeness and economic policies which enabled them make more effective use of resources namely land, labour and capital and pull economically ahead of the rest of the world However, as we shall see in this chapter, this claim is largely unsubstantiated

Economic History of Europe

The decline of feudalism in Europe leading up to the French Revolution had a profound effect on the European economy Isolated feudal estates were replaced by centralized nations as the focus of power Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade Growth of specialized education in Europe in the 12th Century gave rise to economic theories and brought in concepts of national economies and state intervention into trade and economic policies The new economic policies had a profound effect on the prosperity and economic power of

Europe

The Elizabethan System

England was the first European nation to begin a large scale and integrated approach to trade This was during the reign of Queen Elizabeth I (1558–1603) The concept of national balance of trade first appeared in an article, “Discourse of the Common Wealth

of this Realm of England,” in 1549 The article stated that "We must always take heed that we buy no more from strangers (other countries) than we sell them, for so should we impoverish ourselves and enrich them.” New markets had to be developed to sell more The economic theory also required cheaper imports This prompted the court of Queen Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish stranglehold on trade with North, Central and South America Queen Elizabeth enacted the Trade and Navigation Acts in Parliament and ordered the British navy to protect and promote of English shipping

Mercantilism

The economic theory of “Mercantilism” was further refining of the Elizabethan System Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics The French government became deeply involved in the economy in order to increase exports Protectionist policies were enacted that limited imports and favored exports Industries were organized into guilds and

monopolies, and production was regulated by the state through a series of over a

thousand directives outlining how different products should be produced In 1539, France banned the import of woolen goods from Spain A number of restrictions were imposed

on the export of bullion To improve industry, foreign artisans and craftsmen were

brought in French government also took steps to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals These policies were quite successful France's industrial output and economy grew considerably during this period and France became the dominant European military power France never developed a strong navy and never became a major trading power Britain and the Netherlands remained supreme in the trading field

In England, Mercantilism reached its peak during the Long Parliament Government (1640–1660) Mercantilist policies were also embraced throughout much of the Tudor and Stuart reigns In Britain, government control over the domestic economy was far less extensive than on the Continent Government controlled monopolies were common British mercantilism was mainly restricted to efforts to control trade A wide array of regulations was put in place to encourage exports and discourage imports Tariffs were placed on imports and bounties given for exports The export of some raw materials was banned completely The Navigation Acts expelled foreign merchants from England's domestic trade The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials required

by Britain and to trade only with Britain This led to friction with the colonies in North America and was one of the major causes of the American Revolution The Mercantilist policies turned Britain into the world's dominant trader, and an international superpower.The other nations of Europe also embraced Mercantilism to varying degrees The

Netherlands, which had become the financial center of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few Mercantilist policies Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years War (1618–1648) Prussia under Frederick the Great was perhaps the most rigidly controlled economy in Europe During the economic collapse of the seventeenth century Spain did not have a coherent economic policy

Mercantilism also fueled the establishment of European colonies around the world Each European nation attempted to seize colonies that would be sources of raw materials and exclusive markets This expansion was often conducted under the aegis of companies like the British and Dutch East India Companies or the Hudson Bay Company with

government guaranteed monopolies in a certain part of the world Though Mercantilism has been criticized by economists like Adam Smith and economic liberalization is made out to be economic concept of our time, the countries of the world continue to fight each

other for access to raw materials and exclusive markets Mercantilism is now practiced by large developing countries like China, India, Brazil etc who are strong enough to resist the pressure of the developed countries to “Globalize” the economy by removing trade and investment barriers and reducing import duties.

Growth of Economic Institutions

Economic institutions like banks, limited companies and stock exchanges first made their appearance in Europe Evolution of banks was perhaps the most important development

in the growth of financial institutions Before banks appeared on the scene, credit

requirements of businesses, individuals and even the kings were met by money lenders who charged steep interest for the money lent However, there was the problem of safe keeping of surplus cash In England such funds were kept with reputed goldsmiths who even paid interest on the money given to them for safekeeping Banks evolved to meet these two requirements The bank held cash for customers, lent money and discounted bills of exchange They paid interest on the cash deposited; collected interest on funds lent and charged a fee for discounting bills of exchange The first bank to be established

in Europe was an Italian bank at Venice in the 12th Century The Amsterdam Bank in Holland was established in 1609 and it had benefited Dutch commerce tremendously by enabling companies and individuals to raise money when required In 1694, while

England was at war with France, the English Government became desperately short of money The Stuarts had defaulted on their loans so often that the Treasury found it

difficult to raise money In desperation, King William and his ministers allowed a group

of wealthy people to form a public bank In return the bank agreed to give the Treasury a loan of 1,200,000 pounds The Bank of England was thus founded by an act of the

Parliament in 1694 Along with the banks came currency notes Initially, bank notes were hand written with a face value of at least 20 pounds Notes of 1 and 2 pounds were

introduced in 1797 Banks contributed immensely to the growth of European commerce and prosperity by providing large funds for commercial ventures which individual money lenders might have found difficult

The second most important development was the evolution of joint stock companies Proprietary and partnership business had always been there A joint stock company is a company or business organization involving two or more individuals that own a part (share) of the capital or investment (stock) Certificates of ownership called "shares" are issued by the company in return for financial contribution The shareholders are free to transfer their ownership interest in the company at any time by selling their shareholding

to others In modern company law, the company possesses a legal personality separate from shareholders The shareholders are only liable for the company's debts to the value

of the money they invested in the company Today joint stock companies are commonly known as corporations or limited companies The earliest joint stock company was

reportedly formed at Toulouse, France in 1250 The Swedish company Stora is reported

to have undertaken a stock transfer in 1288 The British East India Company, one of the most famous joint stock companies, was granted an English Royal Charter by Queen Elizabeth I on December 31, 1600 Soon afterwards, the Dutch East India Company issued shares in 1602 The evolution of the joint stock company was the major driving

force for overseas trading and expeditions to Asia, Africa and the Americas The risk in such ventures was colossal But it was shared by the shareholders and limited to their investment So there was no risk of going bankrupt The amounts that could be raised were also much more than what could be raised by individuals or small groups The joint-stock company thus became a more viable financial structure than previous guilds or state regulated companies Joint stock companies were also the driving force behind the

industrial revolution Money could be raised easily for commercializing new inventions and innovation by setting up factories or developing sources for raw materials like mines and plantations

The third most important financial institution to evolve was the Stock Markets where the shares could be bought and sold The London Stock Exchange was established in 1802 Soon stock exchanges were established in all the European capitals Fortunes could now

be made or lost by speculating on the value of shares

Industrial Revolution

The Industrial Revolution was a period in the 17th and 18th Century when major changes took place in agriculture, manufacturing, and transportation systems It started in Britain and spread to Europe It brought great socio-economic changes throughout Europe and North America and eventually the world The manual labour based economies of the Great Britain, Europe and the United States began to be replaced by one dominated by industrial mass production with machinery The first mechanically operated cotton

spinning mill started working in Britain in 1743 Concrete was developed in 1756 using lime mortar The textile industry was mechanized in 1769 The steam engine was

invented in 1775 Development of new techniques of making iron and steel using coal instead of charcoal took place with the setting up of a blast furnace in 1709 Forges for making sections came up in1785 The first iron bridge was built in 1778 Mechanical mining using the steam engine commenced in 1770 Industrial revolution brought great economic benefits to Europe and America

The development of financial institutions of the kind prevalent in Europe and later in the United States was not seen in the feudal or tribal nations of Asia, Africa and the

Americas Neither was there any industrial revolution outside Europe and the United states till the 20th Century These countries fell behind the Europeans in economic and consequently military power They were thus first exploited by the early European

multinational companies and subsequently colonized between 1750 and 1950

Early Multinational Corporations

Multinational companies are companies which operate outside their country of founding Such companies started to appear in Europe at the start of the 7th Century

British East India Company

The British East India Company was the oldest multinational company formed in Europe and the world It was formed on 31 December 1601 as a joint stock company for pursuing trade with East Indies, a term used at the time to indicate South East Asia of today The company traded mainly in cotton, silk, indigo dye, natural potassium nitrate, tea and opium The high profits reported by the Company from its Indian operations prompted King James I of Britain to send a diplomatic mission to the court of Mughal Emperor, Jahangir in 1612 A commercial treaty was signed and the Company was granted

exclusive rights to reside and build factories in many parts of India In 1711, the

Company established a trading post in Guangzhou (earlier known as Canton), China, to trade tea for silver The Company came to rule large areas of India from the Battle of Plassey in 1757 till the Sepoy Mutiny of 1857 when the British Crown assumed direct administration of India under the Government of India Act of 1858 During this period it exercised military power and assumed administrative functions in addition to its

commercial pursuits It effectively functioned as a mega corporation

British East India Company displayed many characteristics of modern day multinationals namely ruthless exploitation of the resources available particularly native farmers and plantation workers, influence peddling at home and in the country of operation and high profits at all cost The Company developed a strong lobby in the English parliament It lent a sum of £3,200,000 to the British treasury, in return for monopoly trading rights By

1720, 15% of all British imports were from India Almost all of it passed through the Company Britain surged ahead of its European rivals in manufacturing and trade

Demand for raw materials and profits from India were boosted by the need to sustain the troops and the economy during Britain’s wars with its European neighbors As a result, Britain experienced higher standards of living Its overseas trade increased The

Company became the single largest player in the British global market However, by the middle of the 19th Century, the Company was in financial trouble due to increasing

expenditure on military campaigns and administration By the middle of the 19th century, the Company's rule extended across most of India, Burma, Malaya, Singapore, and Hong Kong and a fifth of the world's population was under its trading influence The Indian Sepoy Mutiny of 1957-58 changed all that The Company was nationalized and all its Indian possessions were taken over by the British Crown under the Government of India Act of 1958 Till its nationalization, the Company held a privileged position in relation to the British Government similar to what most multinational companies do today As a result, it was frequently granted special rights and privileges, including trade monopolies and tax exemptions These caused resentment among its competitors, who saw unfair advantage in the Company's position Despite this resentment, the Company remained a powerful force for over 250 years The Company was finally dissolved in 1874

Dutch East India Company

Next came the Dutch East India Company It was a chartered company established in

1602 It was the second oldest multinational company in the world The government of Netherlands granted it a 21 year monopoly to carry out colonial activities in Asia It was granted quasi-governmental powers, including the authority to maintain armies, build forts, wage wars, imprison and execute convicts, negotiate treaties, coin money, and

establish colonies The Company eclipsed all its rivals in the Asian trade Between 1602 and 1796 the Company sent almost a million Europeans to work in the Asian trade on 4,785 ships, and netted for their efforts more than 2.5 million tons of Asian goods By contrast, the rest of Europe combined sent only 882,412 people from 1500 to 1795, and the fleet of the British East India Company, the Company’s nearest competitor, was a distant second to its total traffic with 2,690 ships and a mere one fifth the tonnage of goods carried by the Company In 1640, the Company established itself in Sri Lanka, and broke the Portuguese monopoly of the cinnamon trade In 1658, the Company’s forces captured Colombo the capital By 1659, the Portuguese were expelled from Sri Lanka and the Company secured the monopoly over cinnamon trade The Company went on to conquer the entire Malabar Coast of India up to Goa In 1652, Dutch established an outpost at the Cape of Good Hope (the southwestern tip of Africa, currently in South Africa) to re-supply its ships on their journey to East Asia This post later became a full fledged colony called the Cape Colony, when more Dutch and other Europeans started to settle there The Dutch East India Company established trading posts were also

established in Iran, India, Malaysia, Thailand and China By 1669, the Company was the richest private company the world had ever seen, with over 150 merchant ships, 40 warships, 50,000 employees, a private army of 10,000 soldiers, and a dividend payment

of 40% on the original investment

A major problem in the European trade with Asia at the time was that the Europeans could offer few goods that Asian consumers wanted European traders therefore had to pay for spices with gold and silver, and this was in short supply in Europe The Dutch and English had to obtain gold and silver by creating a trade surplus with other European countries To overcome this problem the Company started an intra-Asiatic trade system, whose profits could be used to finance the spice trade with Europe The Company traded throughout Asia Silver and copper from Japan were used to trade with India and China for silk, cotton, porcelain, and textiles These products were either traded within Asia for the coveted spices or brought back to Europe The Company established a trading post on

an artificial island off the coast of Nagasaki For more than two hundred years, it was the only place where Europeans were permitted to trade with Japan

Around 1670, the Third Anglo-Dutch War interrupted the Companies trade with Europe

In 1741, the Dutch were defeated by the Indian ruler of Travancore Around the turn of the 18th Century, demand for Asian commodities increased in Europe There was also an abundant supply of capital at low interest rates This enabled the Company to easily finance its expansion in the new areas of commerce Between the 1680s and 1720s, the Company approximately doubled in size The tonnage of the returning ships rose by 125 percent in this period However, the Company's revenues from the sale of goods landed

in Europe rose by only 78 percent For various reasons the era of expansion turned out to

be less profitable with annual return on investment coming down to 3.5 percent while the average annual profit remained around 2 million guilders

From 1730 to 1780, the fortunes of the Company continued to decline Local rulers gradually squeezed the Company out of Iran, Surat, the Malabar Coast, and Bengal in India The Fourth Anglo-Dutch War (1780-1784) finished the Company British attacks

in Europe and Asia reduced the Companies fleet by half The British captured valuable cargo at sea and devastated its remaining power in Asia The direct losses of the

Company were calculated to be 43 million guilders After the Fourth Anglo-Dutch War, the Company became a financial wreck Its possessions in present day Indonesia and the debt were taken over by the Dutch Government and named the Dutch Republic of

Batavia also called the Dutch East Indies After independence it became the Republic of Indonesia The Company was nationalized on 1 March 1796 by the Dutch Government Most of the former possessions of the Company were subsequently occupied by Great Britain during the Napoleonic Wars Some of these were restored to the Dutch

Government by the Anglo- Dutch Treaty of 1814

Other Early Multinationals

The success of the British and Dutch East India Companies prompted other European powers to set up their own multinational companies to obtain a share of the Asian trade The French East India Company was established in 1664 It was granted a 50-year

monopoly on trade in the Indian and Pacific Oceans, a region stretching from the Cape of Good Hope to the Straits of Magellan The French monarch also granted the Company a concession in perpetuity for the island of Madagascar, as well as any other territories it could conquer The Company failed to found a successful colony on Madagascar, but was able to establish ports on the nearby islands of Bourbon (today’s Reunion Island) and Ile-de-France (today's Mauritius) By 1719, it had established itself in Chandanagore and Pondicherry in India In the same year the Company was merged with other French trading companies The reorganized corporation resumed its operating independence in

1723 The Company was not able to maintain itself financially, and it was abolished in

1769 The company was reconstituted in 1785 In 1790, its monopoly was withdrawn Not accustomed to competition, the Company fell into steady decline and was finally liquidated in 1794

The Danish East India Company was founded in 1616 It was focused on trade with India and had its base near Nagapattinam in Tamil Nadu, India During its heyday, the Danish East India Company imported more tea into Europe than the British East India Company and smuggled 90 percent of it into Britain, and sold the tea at a huge profit However, the company could not operate profitably for long and was dissolved in 1729 Its possessions

in India became Danish Crown colonies Denmark finally sold its settlements in India and the Danish Gold Coast to the British in 1850

The Swedish East India Company was founded in 1731 for the purpose of conducting trade with the Far East It grew to become the largest trading company in Sweden during the 18th century However its European influence was marginal It folded up in 1813.The early European multinationals, like the multinationals of today, played an important role in enriching their countries of origin They also established trading and military bases all over Asia, Africa and enabled Europe to colonize the world

Europe Colonizes the World (1750 – 1950)

European colonies were the product of the European Age of Exploration starting in the 15th century The initial motivation behind spreading out to the unknown parts of the world was trade The growth of the Ottoman Empire and the fall of Constantinople to it

in 1453, cut off over land trading routes with Asia Europeans were thus forced to try to discover new sea trading routes The early multinational companies of Britain,

Netherlands, France, etc first set up trading posts along the coast lines and islands of Africa, Asia and Americas They then built forts and armies, acquired territories and finally became the rulers Only China, Mongolia and Japan escaped being colonized, possibly because their sea distance from Europe made it difficult and uneconomical to colonize them

Portugal led the way in exploring along the coast of Africa in search for a maritime route

to India They established the first direct European diplomatic contacts with Indian states

in 1511, China in 1513 and Japan in 1542 They were followed by Spain near the close of the 15th century France, England and the Netherlands followed the Portuguese and Spanish trade routes into the Atlantic, Indian and the Pacific Oceans, reaching Australia

in 1606 and New Zealand in 1642

The Portuguese Colonial Empire was the first global empire in history It also lasted the longest from 1415 capture of Ceuta, a tiny city state on the African coast opposite

Gibraltar, to handing over of Macau, another city state to China in 1999 Portugal began the “Age of Exploration” by exploring the Atlantic coast of Africa, establishing trading posts for gold and slaves during the 15th century In 1498, a Portuguese expedition commanded by Vasco da Gama reached India by circumnavigating Africa, and initiated Portuguese trade and colonization in the East The Portuguese empire consisted of a vast number of small and large colonies that are now part of 49 different sovereign countries The most important of them were Brazil, Portuguese West Africa (Angola), Accra

(Ghana), Portuguese Gold Cost, Portuguese Guinea- Bissau, Portuguese Madagascar, part

of Morocco, Portuguese East Africa (Mozambique), Zanzibar (Oman), Aden, Bahrain, Sri Lanka and Goa Some of these were lost to other European powers, particularly Great Britain

Spain took control of a large part of North America including Mexico, Florida in the United States, all of Central America and a great part of South America including

Argentina, Peru, Colombia, Venezuela, the Caribbean islands including Cuba, and the Philippines Britain colonized the whole of Australia and New Zealand, most of India, Malaysia, Burma (Myanmar), Ceylon (Sri Lanka), and large parts of Africa including Egypt, Kenya, Uganda, Rhodesia (Zimbabwe), South Africa, Namibia, Nigeria, Jamaica and Trinidad and Tobago in the Caribbean Islands and Canada France held parts of Canada and India (nearly all of which was lost to Britain in 1763), Indochina (Vietnam, Laos and Cambodia), large parts of Africa including Sudan, Rwanda, Ivory Coast,

Algeria, Tripolitania (Libya), Louisiana Tract in North America (later sold to the United States) and Lebanon The Netherlands established a large number of trading posts in Sri Lanka, India, New York in North America but lost all of them to Britain in the 4th Anglo Dutch War It however held on to Batavia (Indonesia) till the end of World War II

Germany colonized Tanganyika (Tanzania), Rwanda (up to 1917), German South West

Africa (Namibia) in Africa Belgium colonized Congo Italy colonized Somalia, Eritrea and part of Somalia Russia acquired Siberia, Central Asia and Alaska (which it later sold

to the United States)

This colonization helped the economy of the European countries owning them Trade flourished because of the ability of the colonizers to access local produce like cotton, silk, spices, indigo, coffee, coco, sugar, jute, timber, ivory and handicrafts which were in great demand in the affluent societies of Europe The colonies also provided captive markets for manufactured goods and weapons By the late 16th Century, silver obtained from South, Central America and Mexico accounted for one fifth of the Spain's total budget The European countries fought wars amongst themselves that were largely paid for by the money coming in from the colonies Nevertheless, the slave trade, sugar cane and banana plantations of the West Indies (Caribbean Islands), rubber plantations of Malaya, and coffee and coco plantations in Africa and South America produced huge profits for the European countries

European powers exploited the resources and people of their colonies to the hilt In India, the British forced the farmers of Bengal and Bihar to cultivate Indigo instead of rice It did not matter that many starved and there was a famine in 1942 What mattered was that the British companies made handsome profits It is also said that the British cut off the thumbs of the Muslin weavers of Bengal because the cloth manufactured in Britain could not match the local fabric “Muslin” which they produced It did not matter that the

weavers starved What mattered was that British cloth produced in Manchester could be sold and British companies made good profit

Slave Trade

The primary objective of European colonists was to exploit New World’s land and

resources for profits Native peoples were at first utilized as slave labor by the European colonists Large numbers of them died from overwork and diseases A vast amount of labor was needed to create and sustain plantations that required intensive labor to grow, harvest, and process prized tropical crops When a sufficient unpaid or under paid

workforce could not be locally collected, importing slaves seemed to be the logical solution Western and Central Africa and India became the source for enslaved people to meet the demand for labour

A number of African kings and merchants took part in the trading of enslaved people from 1440 to about 1833 They sold their prisoners of war to European or Arab buyers Selling captives or prisoners was common practice amongst Africans and Arabs during that era With the rise in demand due to European needs, enslaving ones enemy became less a consequence of war, and more and more a reason to go to war The European traders exported goods from Europe to African Kingdoms For each slave, the African rulers would receive weapons, ammunition and manufactured goods from Europe

European traders under their countries naval protection then transported enslaved

Africans across the Atlantic Ocean in their own specially designed ships to the Americas and the Caribbean Islands The plantation economies of the New World were built on

slave labor Seventy percent of the enslaved people brought to the new world were used

to produce sugar, the most labor-intensive crop The rest were employed for harvesting coffee, cotton and tobacco, and in some cases in mining The produce of slave labour operated plantations in the colonies including cotton, sugar, tobacco, molasses and rum were then shipped back for sale in Europe at huge profits In the European colonies, the slaves' children were legally enslaved at birth

The enslavement of Africans and shipping them to South American colonies of the

Portuguese and Spanish empires started in 1502 The Portuguese bought slaves from African rulers and merchants They also carried out expeditions to capture and enslave Africans They then either sold them to other European colonizers to make money or used the slaves for running plantations in their own colonies The Spanish empire took money and awarded license to merchants to trade in slaves in their colonies After 1580, the British, French and Dutch traders joined the lucrative trade The main destinations of the slaves were the Caribbean colonies, Brazil, and North America These European countries built colonies in the New World whose economies were dependent on slave labour Britain also shipped slaves and “bonded labour” (poor people who had borrowed money at high interest rates and were forced to work for generations without

remunerations) from India to its colonies particularly Fiji, East and Southern Africa and the Caribbean Islands Descendants of these Indian are found in very large numbers in these countries

Most historians now agree that at least 12 million slaves left the African continent

between the 15th and 19th century 10 to 20 per cent died on board ships Thus a figure of

11 million enslaved people transported to the Americas The slave population multiplied with time The West Indian colonies of the European powers were some of their most lucrative possessions

Denmark, which had been active in the slave trade, was the first country to ban the trade through legislation in 1792 The ban took effect in 1803 Britain banned the slave trade in

1807, imposing stiff fines for any slave found aboard a British ship The Royal Navy, which then controlled the world's seas, moved to stop other nations from continuing the slave trade Between 1807 and 1860, the West Africa Squadron of the British Navy seized approximately 1,600 ships involved in the slave trade and took custody of 150,000 Africans who were aboard these vessels However, several hundred slaves a year were transported by the British navy to the British colony of Sierra Leone, where they were made to serve as 'apprentices' in the colonial economy until the Slavery Abolition Act of

1833 was passed in Britain The British planters were compensated with twenty million pound sterling, and slaves were required to remain as slaves on the plantations for a further six years

Trans-Atlantic Slave Trade lasted for over three and a half centuries from 1502 to 1859 Can any American or European economist calculate the wealth generated by slave trade and the productivity of over 12 million African and Indian slaves who worked on the plantations, mines, roads, railways and homes without any remunerations in the colonies

for a period of over 350 years? Trading in slaves and their exploitation is the foundation

on which much of the prosperity of Europe was built

Opium Wars with China

The Chinese Emperor prohibited the sale and smoking of opium in 1729 The East India Company established an elaborate scheme to defeat the ban Opium produced in India was taken to the Chinese coast hidden aboard British ships and then smuggled into China

by native merchants to pay for tea imports British exports of opium to China grew from

an estimated 15 tons in 1730 to 75 tons in 1773 For the fifty years from 1773 to 1823, opium trade with China became they main money spinner for the East India Company

In 1756, the Qing Dynasty ruling China passed a decree which restricted foreign trade to one port, Canton, and stopped foreigners from entering China As a result, the British East India Company faced a trade imbalance in favor of China To overcome the

problem, the company invested heavily in opium production and sale to Chinese

smugglers British and United States’ (then a British Colony) merchants brought opium from the British East India Company's factories in the Indian state of Bengal, and shipped

it to the coast of China, where they sold it to Chinese smugglers for silver The Company had its monopoly on opium trade recognized by the British government, which itself wanted the silver By the 1820s China was importing 900 tons of Indian opium annually

By 1938, the figure reached 1400 tons The Chinese tried to stop the smuggling Some native drug traffickers were put to death They forced the British merchants to surrender their opium to be destroyed When the British learned of what was taking place in

Canton, they sent a large contingent of the British Indian army, which arrived at Canton

in June 1840 British warships wreaked havoc on coastal towns After the British

captured Canton, they sailed up the Yangtze River and captured the tax barges of the Chinese Emperor It was a devastating blow to the Chinese Empire In 1842, the Qing authorities sued for peace, which concluded with the Treaty of Nanking ending the First Opium War The treaty was ratified in 1843 In the treaty, China was forced to pay an indemnity to Britain, open four ports to Britain for trade, and cede Hong Kong to Queen Victoria In the supplementary Treaty of the Bogue, the Qing Empire also recognized Britain as an equal sovereign power and gave British subjects extra-territorial privileges

in ports covered in the treaty

The Chinese authorities were reluctant to adhere to the terms of the 1842 Treaty of

Nanking They tried to keep out as many foreign merchants as possible and victimized Chinese merchants who traded with the British at the ports opened under the Treaty To protect those Chinese merchants who were friendly to them at Hong Kong, the British granted their ships British registration in the belief that the Chinese authorities would not interfere with vessels which carried the British flag In October 1856 the Chinese

authorities in Canton seized a vessel called the "Arrow" which had been engaged in piracy The "Arrow" had formerly been registered as a British ship and was still flying the British flag when it was seized The British consul in Canton demanded the

immediate release of the crew and an apology for the insult to the British flag The crew was released, but no apology was given In reprisal, the British governor of Hong Kong

ordered his warships to bombard Canton The incident set the stage for the Second

Opium War

A strong Anglo-French force was dispatched to teach the Chinese a lesson The force occupied Canton in December 1857, and then cruised north to briefly capture the Taku Forts near Tientsin in May 1858 The invasion led the Chinese to accept the Tientsin Treaties of June, 1858 Under the treaty, China agreed to open more ports for foreign trade, to legalize opium imports, to establish a maritime customs service with foreign inspectors, to allow foreign diplomats at Peking and to allow Christian missionaries into interior China China soon abrogated the Anglo-French treaties and refused to allow foreign diplomats into Peking In 1859, a British naval force was repulsed with losses Undeterred by the setback, another Anglo-French force of 11000 British and 7000 French forces attacked China in 1860 The force reached the walls of Peking (Beijing) on

September 26 The Old Summer Palace at Peking was occupied, looted and burned on October 24 China capitulated Ten new ports including Tientsin were opened to trade with the western powers, foreign diplomats were to be allowed at Peking and the opium trade was deregulated Kowloon, on the mainland opposite Hong Kong Island, was surrendered to the British An indemnity of three million ounces of silver was paid to Great Britain and two million to France These treaties were soon followed by similar arrangements with the United States The Treaties later came to be known as the

“Unequal Treaties” The Opium Wars was the start of China's “Century of Humiliation”

Post War Europe

The World War II completely devastated Europe Much of its cities and industries were completely destroyed by bombing The governments were impoverished by the war expenses Governments required American finances to rebuild their countries and

economies The British pound lost its premium status to the dollars The colonies started independence movements The European countries found it impossible to finance the colonial wars of independence One by one, the colonies became independent The

European countries lost their cheap sources of raw material and captive markets Local industrial production ate into their exports Trade balances reversed as European imports exceeded their exports As neo-liberal capitalism caught on, European companies except Germans shifted their mining and manufacturing to the developing world in search of higher profits The European investors made more money But unemployment and

poverty of the ordinary people kept increasing Government debts are rising to dangerous levels and sovereign defaults seem round the corner The European Union and its central bank have spent billions of dollars to bail out Greece and banks in Spain Governments have initiated austerity measures such us increasing retiring age and reducing salaries and pensions and axing public sector jobs The austerity measures are deeply unpopular and labour unrests and protests break out from time to time Many of the European countries like Britain, Italy and Greece are in recessions Many banks in Europe are in danger of collapsing and require billions of dollars in bailouts The chances of Greece leaving the European Union are real Spain and Italy are likely to require bailouts

In 2011, two hundred fifty five years after 1756 when the seeds of the Opium wars were sown, Britain again has a trade deficit with China Today it has no colonies to exploit or opium to sell at gunpoint It has no slaves to produce cheap goods and services Britain and most of Europe can only borrow money to balance their budgets and seek foreign investment to create jobs They can only borrow or print money to import food, fuel, household goods, clothes and shoes from the developing world Britain is

decommissioning warships China and India are adding new ones

Conclusion

A study of economic history of Europe clearly proves that the wealth of the nations of Western Europe is not solely or even primarily due to innovation and enterprise Europe colonized most of the world from the 17th to the 20th Century Spain plundered all the Inca and Maya gold and silver and ruled much of Mexico, Central and Latin America Britain, France, Germany, Holland, Italy and Portugal colonized most of Asia and Africa and took complete control of trade and commerce in these countries They took billions of dollars worth of gold and jewelry as war compensation and taxes from the defeated countries Many of the British crown jewels had adorned crowns of Indian and other kings Europeans took over and exploited the natural resources of the colonized countries like minerals, spices, tea, coffee, rubber, ivory and silks with minimum possible

compensation and slave labour It brought them great riches and left the colonies in abject poverty and a state of underdevelopment

Is it also not true that most of the economy of European nations were developed with the help of slaves from Africa at almost no cost at all? Slaves from Africa and bonded labor from India were extensively used in cotton, tobacco, sugar, banana, coffee, tea and rubber plantation in the Caribbean Islands, South America, Africa and Asia and South Pacific Islands

England, France and United States fought and won wars with China for the right to sell opium These countries not only made great wealth from this narcotic trade but also obtained the territory of Hong Kong and about 10 millions oz of silver as compensation for the war

It should be quite obvious that the wealth of the Western European Economies is not purely a result of innovation and enterprise Much of it is due to barbaric acts and

practices which would not be acceptable in today’s world History cannot be reversed Open minded economists must clearly understand that Europe has developed at the cost

of their colonies They plundered the riches of the kings and people of the countries they colonized They exploited the mineral resources of the colonies without any

compensation or royalties They enslaved millions of people They have a head start But things are changing The developed economies, without colonies and slaves to support their economies, are no longer competitive and are on the decline The leading

developing countries like Brazil, Russia, India, China and South Africa and the Asian Tiger Economies are catching up

Back to Contents

Chapter 3: Economic Growth and Decline of United States

Origin of United States

The territory known as United States of America today was the home to a number of native Indian Nations The area was colonized by Europe Britain established colonies on the eastern regions of United States France colonized the Mississippi River valley and called it the Louisiana Tract Spain colonized the shores of the Gulf of Mexico in Mexico and Florida

The British established 13 colonies along the east coast of North America from New Found land to Florida The first colony to survive was James Town settlement of Virginia which was founded in 1607 The early colonies consisted of English farmers whose primary cash crop was tobacco All the colonies were independent farming economies The colonies were established under a system of Proprietary Governors (representatives

of the charter companies who established the colonies) who were appointed under

mercantile charters to English joint stock companies to found and run settlements

England also took over the Dutch colony of New Netherlands (including the New

Amsterdam settlement) which was renamed New York in 1664 With New Netherlands, the English came to control the former New Sweden which the Dutch had conquered earlier This became part of Pennsylvania The 13 British colonies joined together to form the United States of America in 1776, fought a war of independence against Britain and were granted independence in 1883 In about 270 years the United States grew to become the largest, integrated, industrialized economy in the world

The colonies were established by driving away the native Indian population Initially there was very little resistance Land was plentiful and the Indians just moved westwards But the Indians resisted when the settlers moved west from the Appalachian Mountains Frontier warfare during the American War of Independence between the Native Indians and the settlers was particularly brutal Numerous atrocities were committed on both sides Noncombatants of both races suffered greatly during the war, and villages and food supplies were frequently destroyed during military expeditions The largest of these expeditions was the Sullivan Expedition of 1779, which destroyed more than 40 Iroquois villages in order to neutralize Iroquois raids on New York The expedition failed to have the desired effect Indian resistance became even more determined In this connection, the orders of George Washington to General John Sullivan, at Head-Quarters May 31,

1779 make interesting reading:

“The Expedition you are appointed to command is to be directed against the hostile tribes of the Six Nations of Indians, with their associates and adherents The immediate objects are the total destruction and devastation of their settlements, and the capture of

as many prisoners of every age and sex as possible It will be essential to ruin their crops now in the ground and prevent their planting more

I would recommend, that some posts in the center of the Indian Country, should be occupied with all expedition, with a sufficient quantity of provisions whence parties should be detached to lay waste all the settlements around, with instructions to do it in the most effectual manner, that the country may not be merely overrun, but destroyed But you will not by any means listen to any overture of peace before the total ruinment of their settlements is effected Our future security will be in their inability to injure us and

in the terror with which the severity of the chastisement they receive will inspire them.”

The genocide and ethnic cleansing of the native Indians continued till after the battle of Little Big Horn in 1876 which was the last major Indian victory in battle The native Indians were bundled into 310 Indian Reservations spread over a number of states in an area totaling 2.3 percent of the total land mass of the United States which was once their home

A defeated Napoleon sold the Louisiana tract to the United States in 1803 rather than have it fall into British hands The region consists of 12 states in the north-central and north-eastern United States, namely Illinois, Indiana, Iowa, Kansas, Michigan,

Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin Florida was annexed in 1815 Victory in the Mexican Wars (1820-30) enabled the United States acquired the northern half of Mexico This area later became the states of

California, Nevada, Arizona, New Mexico and Utah Oregon was ceded by the British to the United States in 1846 Alaska was purchased from Russia in1867 and became the 49th US State

Colonial Economy Before 1783

England's colonizing what would become the United States was mainly an economic venture Charter joint stock companies, formed by groups of stockholders (usually

merchants and wealthy landowners) ventured across the Atlantic in search of profit While the private sector financed the companies, the King of England provided each project with a charter or grant conferring economic rights as well as political and judicial authority The colonies generally did not show quick profits The English investors often sold their colonial charters to the settlers The colonists were left to build their own lives, their own communities, and their own economy

Throughout the colonies, people lived primarily on farms and were self-sufficient They grew tobacco, and sold timber and tar, both categories of naval supplies needed by

England Settlements spread, and trade in deerskin, lumber, and beef thrived Rice

cultivation was developed on a large scale with the help of slaves imported from growing regions of Africa Indigo, a dye, and a lucrative cash crop was grown with the help of African slaves Slave labor was integral to making the cultivation of rice, tobacco and indigo profitable as cash crops South Carolina had the largest number of slaves in

rice-the colonies A few cities developed Small local industries such as sawmills, and

gristmills emerged as the colonies grew Entrepreneurs established shipyards to build fishing fleets and, in time, trading vessels Iron forges were developed By the 18th century, regional patterns of development had become clear The New England colonies relied on shipbuilding and sailing to generate wealth Plantations using slave labor was the main economic activity in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo The middle colonies of New York, Pennsylvania, New Jersey, and Delaware exported general crops and furs Except for slaves, standard of living was generally higher than in England itself

War of Independence (1775 to 1787)

This was the period of the War of Independence The Congress and the American states had great difficulty in financing the war In 1775 there was at most 12 million dollars in gold in the colonies, not nearly enough to cover immediate expenses of the government, let alone on a major war The British made the situation much worse by imposing a tight blockade on every American port, which cut off almost all imports and exports One partial solution was to rely on volunteer support from militiamen, and donations from patriotic citizens Another was to delay actual payments, pay soldiers and suppliers in depreciated currency, and promise it would be made good after the war Indeed, in 1783 the soldiers and officers were given land grants to cover the wages they had earned but had not been paid during the war A French loan was used in 1782 to set up the private Bank of North America to finance the war

Early Years (1787 to 1817)

The United States’ Constitution was adopted in 1787 It established that the entire nation was a single unified market, with no internal tariffs or taxes on interstate commerce Alexander Hamilton was the first secretary of the treasury during the administration of George Washington He succeeded in building a strong national finance based on taking over the state debts, bundling them with the old national debt and creating new securities which were sold to the wealthy The wealthy, holding government securities now had an interest in keeping the new government solvent Hamilton funded the repayment of debt with tariffs on imported goods and a highly unpopular tax on whiskey Hamilton believed that the United States should pursue economic growth through diversified activities like shipping, manufacturing, and banking in addition to agriculture He sought and got the Congressional authority to create the First Bank of the United States in 1791

In 1801, Thomas Jefferson became president and turned to promoting a more

decentralized, agrarian democracy called “Jeffersonian democracy” It was based his philosophy of protecting the common man from political and economic tyranny He particularly praised small farmers as "the most valuable citizens." However, Jefferson did not change Hamilton's basic policies The charter of the First Bank of United States was allowed to expire in 1811 However, the War of 1812 with the British established the need for a national bank and President Madison reversed Jefferson’s decision The

Second Bank of United States was established in 1816, with a 20 year charter

The first industrial revolution started with the invention of cotton gin in 1793 It was a machine that separated raw cotton from seeds and other waste Soon, large plantations, based on slave labor, expanded in the rich lands taken over from Indians during the 1812 War from the Carolinas westward to Texas The raw cotton was shipped to textile mills in Britain, France and New England The New York Stock Exchange was established 1817.

Days of the American System (1818-1860)

This period saw a major westward expansion The Louisiana Tract in the Mississippi River valley was inhabited by a large number of Indian tribes They were ethnically cleansed and their vast lands were taken over without paying a penny Millions of whites and their slaves moved to the more fertile farmlands of this vast area The States built roads and waterways along the Mississippi and its tributaries opening up markets for western farm products

The American System

The “American System”, originally called "The American Way", was a mercantilist economic policy that was followed by the administration in the first half of the 19th

Century The policy consisted of three parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other measures' to develop profitable markets for agriculture Congressman Henry Clay was the plan's foremost proponent and the first to refer to it as the “American System” The key features of the System or policy was:

It supported a high tariff to protect American industries and generate revenue for the federal government A 20 to 25 percent tax on imported goods was proposed to protect a nation’s business from foreign competition Congress passed it in 1816 It made

European goods more expensive and encouraged consumers to buy relatively cheap American made goods

The policy required maintenance of high public land prices to generate federal revenue

It called for preservation of a central bank to stabilize the currency and rein in risky state and local banks It enabled the Federal Government to borrow from it rather than from private banking system This was established as the Second Bank of United States in

1816

It stressed on development of infrastructure such as roads and canals which would knit the nation together and be financed by the tariff and land sales revenues Among the most important internal improvements created under the American System were the Erie Canal and the Cumberland Road, the first major national highway to be built in the United States from Cumberland in Maryland to Vandalia in Illinois.

It called for Import substitution or setting up industries to produce goods imported from Europe This feature of the American System was adopted in much of the Third World during the twentieth century.

The “American System” was opposed by the Western and Southern States Portions of the American System were enacted by the United States Congress However similar modernization programs were enacted in most states on a bipartisan basis.The Second Bank of United States was chartered in 1816 for 20 years High tariffs were maintained from the days of Alexander Hamilton or 1791 until 1832 However, the national system

of internal improvements to infrastructure was never adequately funded At this time, Britain, under the influence of Adam Smith had given up “Mercantilism” and adopted the

“British System” of laissez-faire and free trade

Boom of 1821-36

1819 to 1821 was a period of downturn in the American economy It was considered to

be the after effect of its 1812 war with Britain By 1821, the economy had recovered The national debt which had reached 90 million dollars was totally liquidated by 1934

General Andrew Jackson (1829–1837), a rich slave holder and supporter of slavery, became the seventh president of United States He drove the Indian population west of the Mississippi River, into the State of Oklahoma He inherited a fast growing economy The population of United States rose from about 10 million in 1821 to 16 million in 1837 There was tremendous growth of the cities and infrastructure Steam boat tonnage in the Mississippi and its tributaries rose from about 63,000 tons in 1830 to 253,000 tons in

1837 Cotton exports rose from about 536,000 bales in 1833 to about 916,000 bales in

1837 The price also doubled from 10 cents a pound to 20 cents a pound The

unprecedented prosperity created a major problem The wealthy began to speculate in land Public land (land taken over by the American Government by driving away the Indians) was offered in unlimited quantities to the people at $1.25 per acre The average annual revenue from this sale of land was about $ 139,000 from 1820 to 1829 This rose sharply up to $ 14.7 million in 1835 and almost $ 25 million in 1836 The speculation was fuelled by rampant printing of paper money and uncontrolled lending by banks The total lending by banks increased from $ 200 million to $ 324 million and paper money in circulation rose from $61 million to $95 million in during the same period By 1836, loans and discounts had reached about $700 million and notes in circulation to about

$140 million Traders and speculators of commodities also started to hoard flour for profit

Panic of 1837

To stop the speculation, President Jackson opposed the renewal of the charter of the Second Bank of the United States, which he believed favored the entrenched interests of rich speculators Jackson also opposed payment for land with paper money and

demanded the government be paid in gold and silver coins His actions led to a liquidity crunch and the “Panic of 1837”, the first major financial crisis of the American Economy and stopped business growth for three years There were demonstrations against inflation and “Flour Riots” in 1837 when some warehouses storing flour were burnt Price of cotton fell to 5 cents per pound in1980 Out of 850 banks in the United States at the time,

343 failed Another 52 failed partially There was a brief recovery in 1838-39 but the economy did not recover fully till 1842

Period of Recovery

Economic growth resumed after 1842 Expansion into new farmlands in the west

restarted By 1860, on the eve of Civil War, 16 percent of the people lived in cities with

2500 or more people A third of the nation's income came from manufacturing

Urbanized industry was limited primarily to the Northeast Cotton cloth production was the leading industry, with the manufacture of shoes, woolen clothing, and machinery also expanding Most of the workers in the new factories were immigrants or their children Between 1845 and 1855, some 300,000 European immigrants arrived annually Many remained in eastern cities, especially mill towns and mining camps, while those with farm experience and some savings bought farms in the West

The first rail road company was chartered in Maryland in 1827 It was to connect

Baltimore in Maryland to Ohio River The project was completed in 1852 Many more railroad companies were chartered Some of the companies were financed by European banks Most of the important towns in the east were connected by 1860 Numerous short lines were built, especially in the south, to provide connections to the river system The First Transcontinental Railroad was built across the country in the 1860s, linking the railroad network of the eastern United States with California on the Pacific Coast

Railroads made a decisive impact on the U.S economy especially in the 1850–1873 era Railroads opened up remote areas, drastically cut the cost of moving freight as well as passenger travel, and stimulated new industries such as steel and telegraphy It provided a fillip to the profession of civil engineering Railroads greatly increased the importance of cities such as Atlanta, Billings, Chicago, and Dallas Railroad executives invented

modern methods for running large-scale business operations and created a blueprint that all large corporations later followed

The California Gold Rush

Gold was discovered in California at the site of a lumber mill near the town of Coloma on the America River in 1848 At the time, the place was in the Mexican district of Alta California The area was transferred to the United States under the Treaty of Guadalupe

in February 1848 at the end of the American-Mexican War About 90,000 gold seekers arrived in California in 1989 and another 300,000 by 1855 Initially gold was “panned” Hydraulic mining was introduced in 1853 The discovery of gold made a large

contribution to the wealth and development of the region The Gold rush had a severe adverse effect on the environment and the native Indian population in California which fell from around 150,000 to 30,000

American Civil War 1861-1865

This was the period of American Civil War It was a devastating conflict About 620,000 soldiers and an unknown number of the civilian population died in the conflict The Republican Party, established in 1856, represented the industrialized North They came to power in 1861 with Abraham Lincoln as president and pushed for abolition of slavery

and expansion of industry, commerce and business In 1862, the first Pacific railroad was chartered In 1863 a national banking system was established to finance the American Civil War In every city a "First National Bank" was established, and many still exist The industrial advantages of the North over the South helped secure a Northern victory The Northern victory changed its economic system The slave labor system was

abolished The world price of cotton plunged, making the large southern cotton

plantations much less profitable Northern industry, which had expanded rapidly before and during the war, surged ahead Industrialists came to dominate many aspects of the nation's life, including social and political affairs The devastation of the South was great and poverty ensued Incomes of whites dropped in the Southern states, but income of the former slaves rose

Era of Reconstruction (1867-1877)

This period which followed the American Civil War is known as the “Era of

Reconstruction” The infrastructure of much of the South, roads, bridges, and railroads which were scarce even before the war had been destroyed or damaged during the war Because of a large slave population, pre-war Southern States did not have public schools The aim of reconstruction was to reconstruct war damage, repair economy of the

Southern States and educate and rehabilitate the freed slaves The government introduced various reconstruction programs, including the founding of public schools in most

Southern States for the first time, and the establishment of charitable institutions Every Southern state subsidized railroads, which policy makers felt could haul the South out of isolation and poverty Millions of dollars in bonds and subsidies meant for reconstruction were fraudulently pocketed by unscrupulous businessmen It is said that one business group in North Carolina spent $200,000 in bribing the legislature and obtained millions in state money for its railroads Instead of building new track, it used the funds to speculate

in shares, reward friends with extravagant fees, and enjoy lavish trips to Europe In spite

of all the corruption and difficulties, thousands of miles of railway lines were built as the Southern system expanded from 17,700 km in 1870 to 46,700 km in 1890 The lines were mostly owned Northerners Railroads helped create a mechanically skilled group of craftsmen and broke the isolation of much of the region

In the United States, from the earliest days until today, a major source of state revenue was the property tax In the South, wealthy landowners were allowed to self-assess the value of their own land These fraudulent assessments were very low, and pre war

property tax collections were very poor In the Southern States, revenues mainly came from fees and from sales taxes on slave auctions During Reconstruction, new spending

on schools and infrastructure, combined with fraudulent spending resulted in huge

deficits and forced the states to dramatically increase property tax rates In places, the rate went up to ten times higher In part, the new tax system was also designed to force

owners of large estates with huge tracts of uncultivated land either to sell or to have it confiscated for failure to pay taxes Property taxes thus served as a market based system for redistributing the land to the landless freed slaves and white poor

To modernize traditional agriculture, reformers founded the Grange Movement in 1867 Federal land grants helped each state create an agricultural college and a network of agents who demonstrated modern techniques to farmers The American labor movement began with the first significant labor union, the Knights of Labor in 1869.

The economy of the Southern States remained based on cotton farming Former slaves became wage laborers, tenant farmers or share croppers They were joined by many poor whites The population grew faster than the economy The only significant manufacturing industries in the South were textile mills in the Carolinas, and some steel mills in

Alabama

The Gilded Age (1878-1890)

After 1877, the economy began to revive The industrial economy of the northern states had been boosted by the war The steam boat made its appearance on the Potomac River

in 1786 and made river traffic faster and cheaper The development of railroads had an even greater effect, opening up vast stretches of new territory for development Railroads also attracted a good deal of domestic and European private investment An explosion of new discoveries and inventions took place, and brought in the “Second Industrial

Revolution” Railroads greatly expanded in mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates Refrigerated railroad cars came into use The telephone, typewriter and electric light were invented By 1890, the USA leaped ahead of Britain for first place in

manufacturing output

Parallel to these achievements was the development of the nation's industrial

infrastructure Coal was found in abundance in the Appalachian Mountains from south Pennsylvania to Kentucky Crude oil was discovered in western Pennsylvania It was mainly used for lubricants and for kerosene for lamps Large iron ore mines opened in the Lake Superior region of the upper Midwest Steel mills thrived in places where coal and iron ore could be brought together to produce steel Large copper and silver mines

opened, followed by lead mines and cement factories Gold continued to be extracted in California By mid 1880, 11 million ounces of gold (370 tons) worth $ 15 billion (2010 prices) had been extracted In 1990, a new mining technique called dredging reduced mining costs considerably By the turn of the century, 20 million ounces of gold worth $

20 billion (2010 prices) were extracted Gold was also discovered in Virginia, Dakota and very large quantities in Alaska.

The largest labor union, the Knights of Labor, collapsed in the 1880s and was displaced

by strong international unions that banded together as the American Federation of Labor (AFL) under Samuel Gompers Rejecting socialism, the AFL unions negotiated with owners for higher wages and better working conditions Union growth was slow until 1900

The Gilded Age saw the greatest period of economic growth in American history After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization From 1869 to 1879, the US economy grew at a rate of 6.8 percent for real GDP and 4.5 percent for real GDP per capita The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8 percent, while the GDP was also doubled Capital investment also increased

tremendously during the 1880s, increasing nearly 500 percent, while capital formation doubled during the decade Long-term interest rates also declined to 3 to 3.5 percent for the first time

Congress enacted the Interstate Commerce Act regulating railroads in 1887 and the Sherman Antitrust Act to prevent large firms from controlling a single industry in 1890 However, these laws were not rigorously enforced until the years between 1900 and

1920, when Republican President Theodore Roosevelt (1901–1909) took office

Age of Conflict between the Progressives and the Tycoons (1890-1913)

The period from 1890 to 1907 was a period of great economic growth led by big business houses The volume of stocks traded on the New York Stock Exchange increased six times between 1896 and 1901 A new building for the stock exchange costing $4 million was opened in 1903

By the turn of the century, a middle class had developed that was critical of both the business elite and the somewhat radical political movements of farmers and laborers in the Midwest and West Known as “Progressives”, these people favored government regulation of business practices to ensure competition and free enterprise But most political leaders were reluctant to involve the federal government too heavily in the private sector, except in the area of transportation In general, they accepted the concept

of liaises-faire, a doctrine of the tycoons opposing government interference in the

economy except to maintain law and order

Panic of 1907

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred when the New York Stock Exchange fell close to 50 percent from its peak of the previous year The crisis was triggered by the failed attempt by some investors to corner the shares of United Copper Company on the stock market in October 1907 When this

bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts This in turn led to the downfall of the

Knickerbockers Trust Company a week later The Knickerbockers Trust Company was New York City's third largest trust company The collapse of the Knickerbockers spread fear throughout the city's trust companies as regional banks withdrew their reserves from New York City banks Panic extended across the nation as vast numbers of people

withdrew deposits from their regional banks This in turn led to a liquidity crisis The crisis could have been more severe if financier J P Morgan had not pledged large sums

of his own money, and convinced other New York bankers to do the same, to shore up the banking system At the time, the United States did not have a central bank to inject liquidity back into the market By November 1907 the crisis had largely ended

Age of the Tycoons

After 1910, mass production was sped up by the electrification of factories In 1913 Henry Ford introduced the assembly line, a step in the process that became known as mass production Many Americans came to idealize businessmen who amassed vast financial empires Often, their success lay in seeing the long range potential for a new service or product, as John D Rockefeller did with oil They were fierce competitors, and single minded in their pursuit of financial success and power Other business giants included Jay Gould, who made his money in railroads, J P Morgan who made his money

in, banking, and Andrew Carnegie who made his money by producing steel Some tycoons were honest according to business standards of their day Others, however, used intimidation, bribery, and guile to achieve their wealth and power For better or worse, business interests acquired significant influence over government Morgan operated on a grand scale in both his private and business life He and his companions gambled, sailed yachts, gave lavish parties, and built palatial homes In contrast, men such as Rockefeller and Ford exhibited puritanical qualities They retained small town values and lifestyles

As devoted church goers, they felt a sense of responsibility to others They believed that personal virtues could bring success They believed in hard work and thrift Later their heirs would establish the largest philanthropic foundations in America Most Americans enthusiastically embraced the idea of moneymaking They enjoyed the risk and

excitement of business enterprise, as well as the higher living standards and potential rewards of power and acclaim that business success brought In 1896 the nation accepted the gold standard and a program of sustained industrialization Farm tractors began being mass produced

Progressives have their Way

When Democrat Woodrow Wilson (1913-1921) was elected President with a Democratic Congress in 1912, he implemented a series of progressive policies In 1913, the Sixteenth Amendment which allowed the Congress to collect income tax without distributing it among states as per their population was ratified Thus income tax was instituted in the United States Wilson also created the Federal Reserve, the central banking system of the United States in 1913 with the enactment of the Federal Reserve Act Current functions

of the Federal Reserve System include serving as the central for the United States,

supervising and regulating banking institutions and protect the credit rights of the

consumers and strike a balance between private interests of banks and the centralized responsibility of government; managing the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of maintaining the stability of the financial system and contain systematic in financial markets and to provide financial services to depository institutions, the U.S government, and foreign official institutions, including playing a major role in operating the nation's payments system

Many of today's U.S regulatory agencies like the Interstate Commerce Commission, the Food and Drugs Administration and the Federal Trade Commission, to break up trade monopolies were created under Wilson Administration The break up of the monopoly of Standard Oil was a major success in this regard

Taking his cue from developments during the “Progressive Era”, Henry Ford, in 1913, offered a very generous wage of $5 a day, to his workers He argued that a mass

production economy could not survive if average workers could not buy the goods

produced However, the wage increase did not extend to women Ford expanded the company's Sociological Department to monitor his workers and ensure that they did not spend their new found bounty on "vice and cheap thrills.”

First World War (1914-1919)

The US remained neutral at the start of the war and exported its products to meet the war time demand of both sides and made money However, in 1917 Germany adopted a policy of unrestricted submarine warfare and sank American ships carrying supplies of Britain and her allies This led to a final break of relations with the Central Powers President Woodrow Wilson requested the Congress to declare war on Germany, which it did on April 6, 1917 World War I brought the US out of its political isolation to the world stage and established it as a world power The export of arms and other items to the war ravaged nations also helped to develop its economy Electrification started as an industry in 1900 But like many consumer industries, its growth slowed down during the war

Roaring Twenties (1920 -29)

The Roaring Twenties was an era of great economic prosperity that was driven by

consumerism It saw the introduction of a wide array of new consumer goods The decade saw North America becoming the richest region on the earth, with industry aligned to mass production, and a society with a culture of consumerism

At the end of World War I, soldiers returned to the United States with money in their pocket There were many new products on the market on which to spend During the 1920s, mass production allowed for cheaper prices Most of the devices that became commonplace in this decade had been developed before the war, but had been

unaffordable to the majority The growth of automobile, movie, radio, and chemical industries skyrocketed during the 1920s One of the most important of these was the

automobile industry Before the war, cars were a rare luxury In the 1920s cheap produced vehicles became common throughout North America By 1927, Henry Ford had sold 15 million Model T cars In all of Canada, there were only about 300,000 vehicles registered in 1918, but by 1929 there were 1.9 million The automobile had wide effects

mass-on the ecmass-onomy and society The automobile industry rapidly became mass-one of the largest industries A number of peripheral companies for producing gasoline, running gas

stations, and motels also came and provided employment

The new technologies led to an unprecedented need for new infrastructure These were mostly built by the government Crucial to the new vehicles were new roads Several roads were upgraded to become highways, and a number of expressways were

constructed Electrification had slowed during the war By 1929 about 80 percent of power used in industry was electric instead of coal Electric power with central electricity generating stations using steam turbines greatly lowered the cost of power Businesses and houses in cities became electrified Electric street railways developed into a major mode of transportation, and electric inter-urban service connected many cities in the northeast and mid-west Vast new power plants were constructed Telephone lines also were now being strung across the continent Another important technology that went from rare to common in the 1920s was indoor plumbing Modern sewer systems were installed for the first time in many regions

These infrastructure programs were mostly left to the local government During the 1920s, most local governments went deeply into debt, under the assumption that an investment in such infrastructure would pay off in the future This would cause major problems in the Great Depression

Urbanization was one of the most important trends during the Roaring Twenties For the first time, more Americans lived in cities than in small towns or rural areas Mass transit systems, the first skyscrapers, and the growing importance of industry made this possible The service sector was also increasing with the finance and insurance industries doubling

or tripling in size The basic pattern of the modern white collar job is often believed to have been established during this period Many of the clerical jobs went to women, who entered the workforce in unprecedented numbers

The roaring 20 s also brought a change in role of women The working woman reached equality with men while simultaneously possessing the appeal of the femme fatale

Pantsuits, hats and canes gave women a sleek look Thus the Roaring Twenties gave a new definition to womanhood The new woman smoked and drank in public, danced and exercised her franchise, kept her hair short, wore make-up, dressed differently, and confidently participated in economic activities

The Administration ended the high wartime taxes Secretary of the Treasury raised the tariff, cut other taxes, and used the large surplus to reduce the federal debt by about a third from 1920 to 1930 Efforts were made to introduce efficiency, by regulating

business practices Unfortunately, farmers never recovered from the wartime bubble in land prices Millions migrated to nearby cities

Wall Street Crash of 1929

The economy was booming Then suddenly economic disaster struck in October 1929 The stock markets crashed The market had been on a six year Bull run that saw the Dow Jones Industrial Average increase fivefold in value The Dow peaked at 381.17 on

September 3, 1929 On October 24 ("Black Thursday"), the market lost 11 percent of its value at the opening bell on very heavy trading Some big financers tried to halt the slide

by aggressive buying in an effort to repeat the strategy that ended the “Panic of 1907” But it did not work On Monday, October 28, more investors decided to get out of the market, and the slide continued with a record 13 percent loss in the Dow The next day, October 29, 1929, about 16 million shares were traded, and the Dow lost an additional 12 percent The market continued to fall arriving at an interim bottom on November 13,

1929 with the Dow closing at 198.60 The market recovered for several months reaching

a secondary closing peak of 294.07 on April 17, 1930 before embarking on another, much longer, slide from April 1931 to July 1932 when the Dow closed at 41.22, its lowest level of the 20th century It would not return to the peak of September 1929 until November 1954

Great Depression and After (1930-1939)

The economy plunged into the “Great Depression” after the stock market crash The Great Depression had devastating effects in virtually every country Personal incomes, tax revenues, profits and prices dropped International trade plunged by more than 50 percent Unemployment in the United States rose to 25 percent In some countries, it rose

as high as 33 percent Industrial cities were hit hard Construction was virtually halted Farming and rural areas suffered as crop prices fell by approximately 60 percent

Businesses and families defaulted on record numbers of loans More than 5,000 banks failed Hundreds of thousands of Americans found themselves homeless, and began congregating in shanty towns that began to appear across the country The Federal

Reserve did not make any effort to intervene by helping banks The money supply fell by one third, and it was hard to get a loan In his last year as president, Herbert Hoover ordered a massive tax increase to boost sagging federal revenues, and signed the

protectionist Smoot-Hawley Tariff Act to reduce imports Canada, Britain, Germany and other trading partners retaliated by increasing taxes on America exports Economists generally agree that these measures deepened an already serious crisis President Hoover and Congress also approved the Federal Home Loan Bank Act to facilitate home loans and mortgages, to spur new home construction, and reduce foreclosures The Act had little effect The final attempt of the Hoover Administration to stimulate the economy was the passage of the Emergency Relief and Construction Act (ERA) which provided funds for public works programs such as dams and the creation of the Reconstruction Finance Corporation (RFC) in 1932 The RFC's initial goal was to provide government secured loans to financial institutions, railroads and farmers Nothing worked Quarter by quarter the economy went downhill, as prices, profits and employment fell

Recovery

Franklin D Roosevelt was elected President in 1932 After he took office, there began a steady, sharp upward recovery that persisted until the brief Recession of 1937-1938 Thereafter, the recovery again continued its upward climb His first step was to declare a five day banking holiday and stabilize the banking system Next he initiated the New Deal, which was a series of economic programs implemented between 1933 and 1936 Government spending increased from 8.0 percent of GNP under Hoover in 1932 to 10.2 percent of GNP in 1936 While Roosevelt balanced the "regular" budget, the emergency budget that funded the New Deal was funded by debt, which increased from 33.6 percent

of GNP in 1932 to 40.9 percent in 1936 There are different views on extent to which the government spending for relief and public works helped to revive the economy The economy had got back on track by 1934, and made a full recovery by 1936 But

Roosevelt maintained that one third of the nation was ill fed, ill housed and ill clothed The economy grew 58 percent from 1932 to 1940 The unemployment rate fell from 25.2 percent in 1932 to 13.9 percent in 1940 when the draft started However, the Republicans considered many measures in the New Deal to be anti business Before the war, the French and the British were realizing that they could no longer compete with United States industry in an open marketplace The British had created their own economic bloc

to shut out American goods

Recession of 1937-1938

In the spring of 1937, American industrial production exceeded that of 1929 and

remained level until June 1937 Then, the Roosevelt administration cut spending and increased taxation in an attempt to balance the federal budget and reduce deficit The American economy then took a sharp downturn that lasted for 13 months through most of

1938 Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster Unemployment jumped from 14.3 percent in 1937 to 19.0 percent in 1938 Manufacturing output fell by 37 percent from the 1937 peak and was back to 1934 levels As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production By May 1938 retail sales began to increase, employment improved, and industrial production went up after June 1938

The GNP of the U.S in 1929 was 101 billion dollars It fell to 68 billion dollars in 1933 and recovered to 103 billion dollars in 1938 The Index for industrial production was 109

in 1929 It fell to 69 in 1933 and reached 112 in 1937 but fell to 89 in 1938 Exports which were 5.24 billion dollars in 1929 fell to 1.67 billion dollars in 1933 rose to 3.18 billion dollars in 1938 Unemployment was only 3.1 percent in 1929 but rose to 25.2 percent in 1933 and remained at a high of 16.5 percent in 1938

Second World War 1940 - 45

During the war the economy operated under so many different conditions that it is

impossible to compare it with peacetime There was massive government spending, price controls, bond campaigns, controls over raw materials, prohibitions on new housing and new automobiles, rationing, guaranteed cost plus profits, subsidized wages, and the draft

of 12 million soldiers The United States produced great quantities of ships, airplanes, vehicles, armaments, machine tools, chemicals, and so on The economy grew 56 percent from 1940 to 1945 in 5 years of wartime.

US Takes Control of World Economy 1946 - 69

This era is also known as the Golden Era of American Capitalism The United States had remained untouched by the ravages of World War II and had built a thriving

manufacturing industry and grown wealthy selling weapons and lending money to the other combatants In fact, its industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939 In contrast, Europe and East Asia were economically shattered The United States held most of world's

investment capital, industrial production and exports In 1945, it produced half the

world's coal, two-thirds of the oil, and more than half of the electricity power It held 80 percent of the world's gold reserves The United States started with initial economic advantage, consolidated it during and after the war and assumed leadership of the

capitalist world

Before World War II, the world had been economically dominated by Britain After the war, the United States became the leading economic power A devastated Britain had little choice Two world wars had destroyed the country's principal industries that paid for the import of half the nation's food and nearly all its raw materials except coal The British had no choice but to ask for aid In 1945, the United States agreed to a loan of $ 3.8 billion in return for market access and trade concessions Charles de Gaulle, the French President and the leading voice of French nationalism, was forced to grudgingly ask the United States for a billion dollar loan In return France promised to curtail

government subsidies and currency manipulation that had given its exporters advantages

in the world market The Soviet hegemony in Eastern Europe provided the foundation for

a separate international economic system But the Soviets never threatened the US

economic hegemony

After the war, United States experienced rapid industrial growth and capital

accumulation Federal taxes on incomes, profits and payrolls which had risen to high levels during World War II were cut back slowly The middle class swelled So did the GDP and productivity This growth was distributed fairly evenly across the economic classes Some attribute this to the strength of the labor unions whose membership peaked during the 1950s Much of the growth came from the movement of low income farm workers into better paying jobs in the towns and cities This process was largely

completed by 1960 Congress created the Council of Economic Advisors (CEA) to promote high employment, high profits and low inflation The Eisenhower administration (1953–1961) supported an active economic approach that helped to establish

Keynesianism as a bipartisan economic policy for the nation

As the world's greatest industrial power, and one of the few nations un-ravaged by the war, the United States stood to gain more than any other country from the opening the entire world to unfettered trade Its capitalism could not survive without markets and

allies The United States got what it wanted through the “Benton Wood” systems for the world economy Its dollar replaced the British pound as the world’s trading currency President Franklin D Roosevelt saw the creation of the postwar order as a way to ensure continuing prosperity for his country The American economy remained very strong for the 24 years from 1949 to 1973.

President Lyndon B Johnson (1963–69) took over a roaring economy He dreamed of creating a "Great Society" Two main goals of the Great Society social reforms were the elimination of poverty and racial injustice New major spending programs that addressed education, medical care, urban problems, and transportation were launched during this period The government financed some of private industry's research and development throughout these decades, most notably ARPANET which would become the Internet However, the expenditure on Vietnam War and other cold war strategies began to affect the economy

Turbulent Years (1970-2000)

The economy remained stable until the 1970s, when the United States suffered

stagflation President Richard Nixon took the United States off the gold standard, and further government attempts to revive the economy failed As the decade progressed, the situation worsened In November 1980, Robert G Anderson wrote, "the death knell is finally sounding for the Keynesian Revolution."

Richard Nixon 1969-1974

Richard Nixon became President in 1969 It was during his presidency that Neil

Armstrong became the first to walk on the moon Inflation was at 4.7 percent, its highest rate since the Korean War The expenses towards the Great Society enacted under

President Johnson together with the Vietnam War costs, were causing large budget

deficits There was little unemployment, but interest rates were at their highest in a

century Nixon's major economic goal was to reduce inflation The most obvious means

of doing so was to end the war This could not be done overnight, and the US economy continued to struggle through 1970

Nixon proposed larger federal grants to the states, but these proposals were rejected by the Congress In 1970, Congress had granted the President the power to impose wage and price freezes This was temporarily introduced in 1971 He also allowed the dollar to float against other currencies, and ended the convertibility of the dollar into gold Nixon's policies dampened inflation through 1972, although their aftereffects contributed to inflation during his second term and into the Ford administration After he won

reelection, Nixon found inflation returning He re-imposed price controls in June 1973 The price controls became unpopular with the public and businesspeople, who saw

powerful labor unions as preferable to the price board bureaucracy The controls

produced food shortages, as meat disappeared from grocery stores and farmers drowned chickens rather than sell them at a loss Despite the failure to control inflation, controls were slowly ended 1974 1973 onwards the rate of growth began to slow down The long

and costly Vietnam War and the military expenditure in pursuit of the “Cold War” around the world had weakened the US dollar and forced President Nixon to leave the gold standard in 1971.

In 1973, the Organization of Oil Producing Countries (OPEC) reduced supplies of oil to the world market in retaliation to American military assistance to Israel during the third Arab Israel War This oil crisis forced oil prices to rise sharply, spurring inflation

throughout the economy and slowing growth The US government imposed price controls

on gasoline and oil This caused shortages and long lines for gasoline The price controls

on gasoline were lifted after a few years, although oil controls remained until the Regan Presidency President Ford, who succeeded President Nixon after the Watergate scandal was not been able to turn round the US economy

Gerald Ford 1974-77

Nixon resigned in 1974 after the Watergate scandal and was succeeded by Gerald Ford Inflation persisted and was the major target of his administration To check it he asked the American people to reduce their spending and consumption But unemployment was rising and this policy did not boost employment The country sank into a mild recession

in 1974 and unemployment rose to 7.4 percent To tackle it he proposed a $16 billion tax break to simulate growth This tax break which was increased to over $ 22 billion

increased the government’s budget deficit but did nothing to generate employment In

1975, New York City was on the verge of bankruptcy Presided Ford did give a federal loan to the city after initially refusing to do so

Jimmy Carter 1977-81

On assuming office in 1977, President Carter inherited an economy in trouble He had severely criticized former President Ford for his failures to control inflation and relieve unemployment Carter tried to revive the economy through various measures He created the Department of Energy and introduced measures to reduce oil consumption He

encouraged use of renewable energies However, there was another energy crisis in 1979 accompanied by steep rise in oil prices Carter reinstated price controls on gasoline He appointed Paul Volker as Chairman of the Federal Reserve in 1979 Volker pursued a tight monetary policy to bring down inflation He succeeded, but the economy slowed and unemployment rose Carter also faced a drastic erosion of the value of the U.S dollar

in the international money markets Many analysts blamed the decline on a large and persistent trade deficit, much of which was a result of U.S dependence on foreign oil In

1980, Carter announced a gradual deregulation of the oil price controls, along with the imposition of a Windfall Profit Tax on domestic oil production The tax was repealed in

1988, when Congress agreed that the tax had discouraged investment in domestic oil production and increased US dependence on foreign oil

Both inflation and unemployment were considerably worse in 1979 than at the time of Carter’s inauguration By May 1979, unemployment had begun rising again It jumped sharply to 6.9 percent in April 1980 and to 7.5 percent in May 1980 An economic

downturn from January to July 1980 kept unemployment at historically high levels (about 7.5 percent) through the end of 1981.The annual inflation rate rose from 4.8 percent in

1976 to 6.8 percent in 1977, 9 percent in 1978, 11percent in 1979 and hovered around 12 percent at the time of the 1980 election campaign Although Carter had pledged to

eliminate federal deficits, the deficit for the fiscal year 1979 was about $27 billion and that for 1980 touched $66 billion By the time of the election campaign in 1980,

approximately 8 million people were out of work The unemployment rate had leveled off

to a nationwide average of about 7.7 percent but it was considerably higher in some industrial states The prime interest rate hit 21.5 percent in December 1980, the highest rate in U.S history under any President Investments in fixed income (both bonds and pensions being paid to retired people) were becoming less in value The high interest rates and the 1979 energy crisis led to a sharp recession in the early 1980s Several key industries including housing, steel manufacturing and automobile production experienced

a downturn from which they did not recover till 1985 Many of the economic sectors that supplied these basic industries were also hard hit To revive the economy, Jimmy Carter ushered in deregulation of the economy and set in motion a big defense buildup in 1980 But it came too late to help him get a second term

Ronald Regan 1981-89

Ronald Regan was the president of United States from 1981 to 1989 He owed his

election to the economy Ronald Reagan was of the opinion that "government is not the solution to our problem, government is the problem." Reagan and his neo-liberal

economic advisors began a program of 'supply-side economics' where the administration cut taxes and spending, and reduced regulations and gave a free hand to businesses The Regan Administration introduced the largest tax cuts in American history and reduced the role of the government The economic policies enacted by him in 1981, known as

“Reganomics” The policies aimed to reduce the growth of government spending and increase economic growth through tax cuts (under Reagan, the top personal tax bracket dropped from 70 percent to 28 percent in seven years) The Regan Administration

continued vigorously with deregulation on corporate activity started by Carter in 1980 Regan also drastically increased defense spending The first two years of the Regan Presidency brought little success to his efforts in improving the economy Volker

continued as the Chairman of the Federal Reserve under Regan for some time till he was replaced by Alan Greenspan and continued with his tight money policy The Federal Reserve's extremely tight monetary policy plunged the American economy into a deep recession Employment conditions deteriorated throughout the year The unemployment rate in the U.S reached 10.8% in December 1982, higher than at any time in post war era Job cuts were particularly severe in housing, steel and automobiles sectors Twelve million people were unemployed, an increase of 4.2 million people since July 1981 Unemployment rates for every major group reached post-war highs, with men age 20 and over particularly hard hit

The Depository Institution Deregulation and Monetary Control Act (DIDMCA) of 1980, passed during the Cater Presidency, had phased out a number of restrictions on banks' financial practices, broadened their lending powers and raised the deposit insurance limit