The Economic Transformation of America: 1600 to Present Essay Example
Fernand Braudel, a modern French historian, sees three intertwined but distinguishable strands of history. They are: material life, economic life, and capitalism. Material life, he says, sets “the limits of the possible”. Material life means the routines of daily work, the everyday tasks that we perform so that we can sustain ourselves.
It covers the means by which we travel to work, the efforts we perform there, the products we make in use, etc. Without including knowing how material life has changed, we would not be able to understand the economic transformation of America.Economic life mainly encompasses market activity, which includes the jostling of buyers and sellers on the market square, the complex acts of offer and bid, purchase and sale that make possible the essential social relationship of exchange. The strand of our overall theme i...
s the evolution of our involvement with the market, both as buyers of goods and as suppliers of our energies. A vital part of the economic transformation of America is the enlargement of economic life. The third strand is capitalism itself.
The best way we can gain an understanding about the nature of capitalism is if we focus our attention on the three elements that it introduces into material and economic life: capital, the market mechanism, and the division of economic and political activity.
- Capitalism is orientated to the continual accumulation of material wealth – as capital. The material wealth in capitalism is in the form of productive capital. Wealth is used to build machines and equipment. The sole purpose of the wealth is to create still more wealth. Consequently, capitalism is expansive in terms of the value and volume of
its output.This character of capitalism is the source of its extraordinary historic impact. The capitalistic force dominates the economic transformation of America.
It is this combination that gives capitalism its restless search for economic opportunities achieved via a constant effort to match supply to demand. )Capitalism creates a new division between economic and political activity. Economic power separating from political power is an essential element of the capitalist structure and thus a central feature of capitalism. This separation brings with it a new conception of economic freedom and new sources of political conflict.
I hope this helps you understand a little more clearly the focus of this book. I also hope that you will realize that the theme of the economic transformation of America is in fact the theme of the development of American capitalism.To follow the development of capitalism means that we must watch the unfolding of material life as it constantly expands the limits of the possible. It also requires that we observe the expansion of economic life as market transactions knit us ever more tightly together.
But most importantly, we must direct our attention to the achievements and failures of the larger structure that we call capitalism. You will shortly see if you have not already that these threads constitute nothing less than the historic evolution of capitalism itself. The first form of capitalism emerged as a result of the rise in
international trade, or mercantilism. Mercantilist policy states that the prosperity of a nation depends upon its capital, and that the volume of the world economy and international trade is unchangeable. The early form of capitalism differed in two respects from what we know today as capitalism. First, it sought its profits from trade rather than from production.
Second, merchant capitalism did not yet depend on competition as a central regulator of the system.Actually, merchant capitalism – mercantilism –was an openly monopolistic system, and it was very different from competitive market system that Adam Smith would advocate a century later. The goal of mercantilism as written by Thomas Mun, a director of the legendary East India Company is: “The ordinary means to increase our wealth and treasure is by farraign trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. ”- This is a very naive approach to mercantilist economics; we know that there is no way that every nation can sell more than it buys. But the mercantilists applied their policy with emphasis on exporting more and importing less from far distant, rather than neighboring nations.”? This is a very naive approach to mercantilist economics; we know that there is no way that every nation can sell more than it buys. But the mercantilists applied their policy with more emphasis on exporting more and importing less from far distant, rather than neighboring nations.
Mercantilists’ economic assets, or capital, was represented by bullion (gold, silver, and trade value) held by the state, which was best increased through a positive balance of trade with other nations.Mercantilism suggests that
the ruling government should advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs.
In America’s first 13 colonies, these tariffs led to the first instances of significant English intervention and control over the American economy. It was during this period that much of the modern capitalist system was established. It was in relation to these colonies that the English mercantilist policy of selling more than England purchased in return was applied with a vengeance.Mercantilism thus put forward an economic policy that placed the Colonies in a deliberately subordinate economic position with respect to their overseas sovereign nation. England used the American colonies as strategic sources of supply and as monopolized markets.
Generally speaking, a colonial nation could only buy from its “home” country; could not freely sell to any other country except its colonial master; and could not sell any of their products that competed with the favored industries back home. The English Parliament passed a series of Navigation Acts from 1651 to 1733.So far as the colonies were concerned, these acts had three important provisions:
- All trade to England from America had to be carried in English ships whose crews had to be 75% Englishman.
- All colonial imports (except wine and salt) had to come from or at least pass through England, en route to the colonies. (This preserved the colonial market for the exclusive benefit of British producers and merchants)
- Certain colonial products could only be shipped to England, such as sugar, tobacco, indigo, rice, etc.
These acts had huge consequences for American economic development. For the American Colonies, founded for many
reasons –religious and idealistic, as well as profit-seeking – were caught up in the economic currents of the mercantilist age. 1776 was the year of the American Revolution, but more importantly, it was the year in which Adam Smith’s book, The Wealth of Nations, was published. Smith never heard of the word capitalism; the economic framework described in his book was a “society of perfect liberty” because of its emphasis on freedom of economic contract.
This was laissez-faire, and he believed that this type of society would work to enhance the wealth of the entire nation. Smith’s theories not only inspired but were also were embodied in the Constitution of the United States, which emerged in 1781. America required its political independence, first and foremost for the sake of independence itself, but also because the colonists recognized that they could not make use of their economic vitality unless they broke the restrictions of their colonial ties. The forging of a workable constitution was the necessary step for the achievement of true political independence, but there remained an equally necessary step before economic independence could be won. Ironically, it was the introduction of the war that first revealed the need for a strong manufacturing sector.
For the Revolutionary Army soon came to depend on America’s small manufacturing capacity. The colonial iron industry assumed critical importance (Washington located his winter camp at Valley Forge to guard its essential metal-working shops).Textile and leather industries were also indispensable for providing the army with its “fatigues. ” With the return of peace, the considerations of national self-sufficiency were relegated to second place behind those of immediate profit.
The expanding American economy again turned
to the appealing prospects of trade and agriculture. In the face of such profits, the lure of manufacturing was small. Besides powerful guidance of natural economic forces, the needed technology was absent, and the preferences of native sentiment in favour of agriculture all tended to direct American economic effort away from manufacturing.As told by an observer in 1818: “The brilliant prospects held up by commerce caused our citizens to neglect the mechanical and manufacturing branches of industry; fallacious views, founded on temporary circumstances, carried us from those pursuits which must ultimately constitute the resources, wealth and power of the nation. ” ? It was not until Alexander Hamilton became Secretary of the Treasury of our new government, that manufacturing finally had an effective and articulate spokesman at the national level.
Hamilton’s burning ambition was to build a strong, prosperous, diversified economy in which political independence would find its roots. In December of 1791, Hamilton submitted his Report on Manufactures, which was the apex of the economic structure he proposed to build. In his report, Hamilton proposed tariffs on foreign competition; controls to prevent exports needed by American manufacturers; subsidies for enterprising manufacturers; rewards for inventions and embargoes to prevent American industrial secrets from leaking abroad; and a vision of an economy in which manufactures exist side by side with agriculture.More striking were his proposals that the government itself should take an active hand in order to bring this new partnership about.
Although a strong believer in private enterprise, Hamilton was the first proponent of a form of national “planning,” in which the government sought to channel the energies of enterprise and directions that presumably served the national
interest better than the unguided pull of the marketplace. Thomas Jefferson was the most articulate supporter of the view that manufacturing was fundamentally corrupting and degrading.Jefferson set himself squarely against the enlargement of manufacturing beyond the need it played in sustaining an independent and self-sufficient household, but did not translate this idea into the scale of an independent and self-sufficient economy. So it should not come as a surprise that during a gradual change in national views about the proper place of manufacture after the Napoleonic Wars (because of the economic hardships Americans had felt during TWO periods of war), that Jefferson was the ultimate conversion.In a letter written to Benjamin Austin in 1816, Thomas Jefferson states: “We have experienced what we did not then believe..
. that to be independent for the comforts of life we must fabricate them ourselves. We must now place the manufacturer by the side of the agriculturalist. ”? In 1828, the first outright protectionist tariff, labelled the “Tariff of Abominations,” was passed, and Hamilton’s Report on Manufactures was finally implemented. Thus, the process of change was recognized and endorsed, but still not begun.
Economic growth, so strongly evident in the earliest days of the colonies had to be diverted away from agriculture and trade toward manufacturing by a lengthy experience during which the nation gradually came to understand the need for, and the requirements of a strong manufacturing capacity. Although much progress had been made since the Revolution, there were still serious problems that hindered the growth of industry. The foundation, the infrastructure, and the material bases of an industrial economy had to be laid down.A country had to be unified
physically as well as politically. A labor force had to be freed from the land and made available to the mills.
To set into motion any new forms of material life, new patterns of economic life were also needed. Until these tasks were complete –and that would not be until the very eve of the Civil War –an all-important aspect of the economic transformation of the country would be incomplete, and full-scale entrance into the age of manufacturing could not begin. Turnpikes were the first effective answer to the transportation challenge.They provided not only a slow circulation of commerce and travel but an economic boom of considerable dimensions.
The main factor regarding the pikes was not speed of travel or convenience but rather the cost of construction. The turnpikes were built with high expectations, little planning, and poor execution; so it should not be a surprise that most failed. To add to the turnpike’s problems, their demise was hastened by the coming of a new and much more efficient means of transportation: the canal. Although canals were not a new invention, in 1809 Dewitt Clinton had an idea of building a canal that linked that Great Lakes and the Atlantic Ocean, which was eventually approved by the legislature in New York. By 1825, all 363 miles of the Erie Canal were completed. The Erie Canal was, in the words of one historian, “the most decisive single event in history of American transportation.
”? It soon became apparent that this canal was conveying a visible stimulus to the development of manufacturing, now that lowered freight rates greatly reduce the cost of raw materials and vastly extended the possibilities of
marketing the output. Next, in order to become more efficient in the canals, James Watt’s steam engine was applied to water transport by John Fitch. Before steamboats shipping freight was essentially one-way (downstream), time-consuming, and costly. A power of steam would enable boats to travel against the current and would transform the Mississippi River into a huge two-way traffic route. The innovation of the steam engine reduced shipping costs, thus making more profit for the northwestern farmers who sold their produce in New Orleans.
Lower costs gave the farmers an incentive to expand production for their market. Next came the development of the railroads. When the first 13 miles of track were built in 1828, the general opinion was that the railroads would not amount to much. During the 1840s alone over $200 million was spent on railroad building-more than the entire investment of the previous four decades on turnpikes, canals, and steamboats.
The railroads cheapened rates and sped up the pace of activity.The railroad could be used year round (RRs never froze over); they served as stimuli for the development of such crucial industries iron (later steel), locomotive manufacture, and metalworking in general. The development of the railroads was more effective than any previous transportation development in stimulating the flow of capital into the economy. Lastly, the railroads were as effective at siphoning European wealth into American capital equipment as they were in completing the network of transportation that was indispensable for the industrial development of our nation.Not only Karl Marx but also Max Weber believed that capitalism could not function without a property-less working class—a mass of workers who had no choice but to sell
their labor on the market, accepting whatever terms and conditions the “market” offered.
America’s industrial system could not find its needed workers because land was cheap and easily available; so first in the Lowell mill system and then in the army of immigration, there were efforts to create a work force willing to perform hard work for low wages. The same transformation that was altering the material aspect of everyday life was bringing into being an organization of work that would change the original aspect of America as a nation of predominantly independent working men and women. With the network of transportation and a new labor force in place, the emerging economy needed the creation of an industrial “know-how,” a general expertise, and native technology. Being behind the eight-ball at the turn of the nineteenth century in terms of technology, did not hurt America’s industrial growth as much as it should have.
That was probably because of our “Yankee ingenuity,” which was at least partly a product of farmer-mechanics who achieved self-reliance and versatility from being trained in country mills and blacksmithing shops. This led to the “American system” of interchangeable parts. By the middle of the nineteenth century, America’s period of industrial preparation yielded: A transportation network solidly laid into place. A labor supply existed that was willing to perform the monotonous tasks of machine tending. Technology capable of producing industrial equipment was well advanced (So advanced that between 1840 and 1860, the number of patents increased 1,000%).
During this age of preparation, we can already see the outlines of an impending change of vast dimensions, a change that would not burst with full force until after
the Civil War, but one that was already capable of working deep changes within the structure of the nation. Alas, the war did come. The problem was not so much the threat posed to the North by the presence of a slave economy in he South, but the economic threat was much more frightening when viewed from the southern side. Not only was the North opposed to slavery, which the plantation system depended upon, but most if not all of the energy that southern congressman put into anti-industrial efforts was for naught. It was evident that the industrial interests in the nation were clearly rising to dominance over agriculture. Basically, the North was getting richer and the South was growing poorer.
Perhaps this is because slavery can not be a part of the capitalist institution.It is not surprising that the South found itself ever more dependent on slavery. The South remained a colonial empire, unreceptive to the modernizing morals of the North. The economic impact of the Civil War was disastrous. It was not just a war; it was carnage. There were 620,000 Americans killed in the conflict.
Although we have a definite number of casualties, the horrendous cost of the lost energies and talents of these Americans cannot be calculated. Estimates of the total cost of the conflict run as high as $20 billion (five times total expenditures of the Federal government from its establishment to 1865). Even with all these disruptive results, the war also brought changes and stimuli that played a positive and even a powerful role in the expansion that followed.
1)The war provided encouragement to a few major industries. -The clothing industry required
expansion to meet the Northern army’s uniform demands. Wartime demand accelerated the need for standardization of men’s clothing and for the mechanization of production.
-The invention of the universal milling machine was another huge technological advance. It was capable of cutting all sorts of metal shapes. It was sold to a variety of industrial companies. The iron industry proved its metal-handling abilities as a result of a war. For the war they could not trim 1. 5-inch steel plates.
By the end of the war they were rolling, forging, and cutting 5-inch plates.
2)A second direct effect of the war was its impact on finance. -Many of the fortunes that would power postwar expansion had their origins in the war, which was the source of many “ill-gotten gains. ” But those same gains would be the source of investments that would account for much of the rush of growth and for the widening and deepening system of industrial production.
3) The most important result of the Civil War was the destruction of slavery.
4) New Legislation
A) Transcontinental railway
B) Protectionist tariffs
C) National Bank Act
As Barrington Moore points out, one must compare what is outlined above with that of the south in 1860—“Federal enforcement of slavery, no high protective tariffs, no subsidies or expensive tax creating internal improvements, no national banking or currency system”—to realize the extent to which the victory of the North represented a victory for industrial capitalism.
Three effects of Industrialization on America:
1)Industrialization revolutionized material life. The objects of everyday use are more profoundly affected by the advent of industrial technology than by any previous change in economic history of mankind.
2)The reach and penetration of the market expanded. The way
that men were mobilized for the economic tasks shifted from the relationship of indenture and apprenticeship to those of wage work in factories.
3)The rhythm and pace of capitalist expansion underwent a vast change. Growth moved more rapidly. Instability became more pronounced as production moved from farm to factory.The feel of institutional life took on a new aspect as huge business enterprises arose, as buccaneers become bureaucrats, and as the government itself was presented with new tasks and challenges. One of the great things about America’s capitalist economy is that the massive process of industrialization was left largely to the market mechanism to work out. The mechanism consists of two elements of equal importance.
The first is the organization of the majority of the nation’s production as a profit-seeking enterprise which was free to carry on whatever activities are permitted by law.The drive for profits thus becomes the central driving force of the market system. The search to make profits pushes businesses in two directions. It serves as a force for the expansion of business and it aids to put businessmen on the alert for new opportunities for profit making. So, the drive for profits propels business into the development of new products, as well as into the expansion of facilities to provide more of existing products. The second part of the market mechanism is the control system.
It is the institution of competition that provides a control: the institution of businesses vying one against another to obtain their ustomers business. When America looks back on her economic history, two men stand out as icons for succeeding in business by the American Way: John D. Rockefeller and Andrew
Carnegie. Both Rockefeller and Carnegie believed in Social Darwinism.
This gave them the “scientific” rationale for their greed, ambition, and ruthless competition. Rockefeller wrote in an address to a Sunday school class: “The growth of large business is merely a survival of the fittest…the American Beauty rose can be produced in splendor and fragrance which brings cheer to its beholder only by sacrificing the early buds which grow up around it.This is not an evil tendency in business. It is merely the working out of the law of nature and the law of God. ”? Andrew Carnegie wrote in his autobiography: “I remember that light came in as a flood and all was clear. Not only had I got rid of theology and the supernatural, but I had found the truth of evolution.‘
All is well because all grows better,’ became my motto, my source of comfort. Man was not created with and instinct for his own degradation, but from the lower he had risen to the higher forms. Nor is there any conceivable end to his march to perfection.His face is turned to the light; he stands in the sun and looks upward. ”? Darwinism gave them the “apparent” scientific rationale for their ruthless business tactics. James Rachels, even though still committed to evolutionism admits in his book Created from Animals, “The ‘survival of the fittest’ was quickly interpreted as an ethical precept that sanctioned cutthroat economic competition.”? Stephen T. Asma, in “The New Social Darwinism: Deserving Your Destitution” points out that this attitude is still present today. He wrote, “Indeed, domination is for us a virtue rather than a vice.If one pauses for a moment
to reflect on whether or not the ‘natural law of competition’ is sound, then one is immediately suspected of impiety.
The church of capitalism watches its flock carefully. ”? After learning about the men who guided Industrialization we need to explore the process itself. Attention would be turned to the gradual introduction of machines and capital goods throughout American life. Since the age of industrialization can basically be summed up as the age of steel, a good starting point is steel.
Henry Bessemer’s process did more than revolutionize the making of steel.As costs fell, steel became the basic building material of many other industries. This was the process that captured Carnegie’s imagination. When Carnegie’s new plant began production in 1875, his complex of mills was worth $700,000. Five years later they doubled in value; and again they doubled three years later. By the turn of the century, Carnegie’s plants were valued at $300 million.
His business was able to grow so quickly because the master key of technology opened vast new market demands for a commodity that had previously been too expensive for commercial use.The new technology and the aggressive tactics of the age were a powerful mixture for economic growth. But they were also a dangerous mixture for economic stability for the technology and the tactics combined to alter the organizational structure of industry quite as profoundly as it altered its physical configuration. From one industry to the next, the increase in size varied according to the technology of the product or process. However, when we look at the country as a whole, and especially at its industrial core, we cannot mistake the trend of business growth.
grew vertically as well as horizontally, buying up sources of supply and reaching forward to the final sale of their products. During this time the forces of technology were bringing out larger and more rapid flows of production, thereby forcing business units to see wider and deeper forms of organization. They did so because horizontal expansion and vertical integration offered corporate managers the opportunity to administer the productive process from start to finish, rather than having to deal with the surprises and possible disruptions of the market as that process moved toward completion.Once vertical integration was achieved, no market forces intruded within the long chain of operations from start to finish.
Eventually the only worthwhile investments were abroad, as good business opportunities in America were hard to find. Now we look at the consequences of the expansion of the American business into the worldwide economy. The most important immediate effect was the devastating new form of competition. Recall that competition was the disciplinary process of the market system.
But this disciplinary effect only held true in an environment of small firms, none of which could take over the entire market.With the coming of new technology, the nature of this disciplining process altered completely. The firm with great economies of scale often had the ability to take away the entire business of a competitor. Competition was awarded to the more efficient firm: Companies had the power not only to “control” prices of a laggard firm, but literally to wipe out such a firm. Competition became a process in which firms struggled for market share. The result was a desperate contest whose consequences would have overwhelming effects on the
workings of the entire economy.
Because the corporation was an entity created by the state, it existed in its own right as of “person” created by law. As such a legal person, the corporation could do anything that a private person could, include: owning, buying or selling property, carrying on business affairs, sue or be sued. But it had two substantial advantages over proprietorships and partnerships: it did not have a limited life span and the stockowner had limited liability. Additionally, unlike a partner, a stockholder may sell the shares to anyone he likes, at any price he can get.Thus with the corporation came the advantage of a much greater liquidity of personal wealth. More important in terms of economic growth was the possibility for successful businesses to tap a source of capital that would have been impossible to reach without the limited liability and high liquidity of stocks and bonds.
Instead of the business owner using his own resources to fund his operation, a whole new layer of capital became available among small merchants and moderately well-to-do citizens who were eager to share in the rising fortunes of the major companies.In order to put this new investment money to work, a host of new financial institutions emerged (savings and commercial banks, investment houses, and life insurance companies) to serve as intermediaries between the investors and corporations. Because of this important role they played in capital formation, financial intermediaries became essential for economic expansion. The corporation was therefore an indispensable addition to machine technology. It was a social invention just as powerful as the technical inventions it controlled.
The corporation represented the development of economic life that was
the cause of vast changes both in material life and in the dynamics of capitalism. Without the possibilities of management and discipline brought by the corporation, the dazzling advances in speed and volume of output never could have been achieved. Without the vast market for capital that the corporation brought into being and then tapped, the extraordinary increase in physical capital never could have been financed.And without the organizational focus of creative energies that the corporation made possible, the accumulation of capital on so vast a scale never could have taken place.
Thus the corporation changed the pace and the dynamics of capitalism as dramatically as it changed the pace and dynamics of business life. Economic growth did not trend along a smooth upward path to the form of booms and busts. This is what we know as business cycle, and economists attribute it to rush of business expansion followed by a contraction.Although the business cycle was not a new experience in economic life, the industrialization process brought much sharper swings in prosperity and recession, thus making it a prime factor in the concentration of businesses in fewer hands.
During years of panic, the strong survived and weak firms when under, as Social Darwinists proposed would happen. When the cycle was over and forward movement resumed, the new volume of production was controlled by a smaller number of firms than before. This caused cutthroat competition to which the obvious response for the firms in a given industry was to get together and agree not to undercut one another. These firms would form “pools,” which were informal agreements on price, to avoid their suicidal race for markets. Yet,
none of these pools worked.
As soon as business worsened, the need to boost revenues would cause one firm after another to reduce its prices. At a meeting of railway managers called to agree on a schedule of freight rates, the president of one railroad slipped out during a brief recess to wire the new rates to his firm so it would be the first to undercut them. Another RR executive is quoted as saying, “I suppose they will cheat but we can stand a great deal of cheating better than competition. ? The reason pools didn’t work was that they were restraints of trade, which was illegal.
Therefore, no company could sue another for breaking its “gentleman’s agreement. ” After the pools failed, business looked for another solution to competition: trusts and mergers. The captains of industry, seeking to enlarge their firms by price competition or by merger, were only following the profit incentive that is the legitimate objective of market behavior. The emergence of giant corporations and of trusts and mergers is the natural outcome of this otivation coupled with the new technologies of mass production and corporate organization. Mergers sought to accomplish “horizontally” what the integration movement had accomplished “vertically. ” Mergers were efforts to replace the invisible hand of market forces with the visible hand of managerial administration.
As the reach and power of business organizations increased, pressure mounted from multiple fronts to use the government as a deliberate force to contain or even prevent business growth. But, efforts to interfere with the natural expansive tendencies of business threaten to dampen the expansive forces of the economy itself.A society that depends on the workings
of a business system cannot easily interfere with the dynamics of that system. So we conclude two things about “Big Business”:
1)The process of economic growth has gradually required the intervention of government—in part to protect the market mechanism from destroying itself and part to assert the claims of a larger society over the fine workings of that mechanism. The question is not whether government should intervene, but where, and how far.
2)Economic growth, which is mainly a force for economic expansion, is also a force for profound structural change.What this change come problems for which no immediate or easy social solution may be available. About three years after the stock market crashed in 1929 (Black Monday), a former president of the National City Bank of New York, Frank Vanderlip wrote: “... The quoted value of all stocks listed on the NYSE was, on September 1, 1929, $89,668,276,854. By July 1, 1932 quoted value of all stocks had fallen to $15,633,479,577.
Stockholders had lost $74,000,000,000... It is $616 for every one of us in America....In the bursting of the NYSE bubble, the value of all stocks fell to 17% of their 9/1/29 price... ” ??The bottom dropping out of the stock market in 1929 ushered in something far worse: The Great Depression. Three causes of The Great Depression:
1) The economy was extremely vulnerable to a crash.
Speculative ventures were unchecked; reckless practices which resulted in pyramids of corporations each holding stock of others were commonplace; and financial manipulation and miscalculation by banks in their lending practices caused many banks to fail, which in turn brought down many other businesses.
2) There was trouble on the farms. No banks = No
loans for farmers. Many farming processes were increasingly mechanized by the success f industrialization, which sent supply way up, causing a big drop in agricultural prices.
3) There was a serious maldistribution of income.
Even though employee productivity increased, which caused output to increase and produced more gains for the firm, the workers did not receive higher wages that corresponded to their higher productivity. These productivity gains mainly showed up as higher corporate profit, which caused the stock market boom. It is clear, however, that the boom in profits not only sparked the stock market rise, but seriously undermined the prosperity of the country.At the top of the income pyramid, the boom created enormous prosperity; not so much at the bottom. John M. Keynes wrote The General Theory of Employment, Interest, and Money during the depression.
At the heart of Keynes’ explanation of depression is a fundamental fact about a market economy: the source of all its employment is spending. Unless money is spent, money will not be received. Keynes classified two types of spenders: Households spend money on consumer goods; Businesses spend to increase capital wealth (investment spending). Business investment depends on expectations of future sales.This is a very important clue to The Great Depression.
All recessions come about because the economy is not spending enough to create high levels of employment or income. So after the Great Crash, businessmen also became pessimistic about their future earnings and cancelled any plans for business expansion (from ’29-’32, investment spending shrank by 88%); this sharp drop in investment spending spread throughout the economy, creating a snowball effect as it went. The most disturbing part of Keynes’ analysis was that there
was no automatic cure for a depression. Only a resumption of investment spending could move an economy in a positive direction. What if there comes a point we’re an increase in investment spending doesn’t help a suffering capitalist economy? It surprised me to learn that all the great economists have expected that capitalism would change so profoundly that it could no longer be called by its name. The main point of disagreement has been over the nature of forces bringing about that change:
A) Adam Smith’s exhaustion of investment opportunities,
B) David Ricardo’s squeeze on profits by rising costs,
C) Karl Marx’s complex dynamics of instability and concentration Economists lso disagree on the length of time capitalism will continue.
Joseph Schumpeter, the most distinguished conservative economist of the 20th century, asked, “Can capitalism survive? ” “No, I don’t think it can,”?? he answered. However, he said it would take another 50-100 years before capitalism gave way to the advance of a kind of bureaucratic socialism. All these theories are great, but we still don’t know what caused the Great Depression and what needed to be done to fix it. The crisis of the 1930s was caused by the vulnerability of a structure of business that had become interlocked on a previously unknown scale.
It was the collapse of the stock market that caused the extraordinary damage; there was a sense that the economy was ruined. Maybe, as Herbert Hoover and other businessman stated this system would in time recover its optimism and begin once again to grow, but maybe not. The citizens were tired of being patient; things had to be done that had never been done before, and quickly.
Part of FDR’s inauguration speech in 1933: “... First of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance...I shall not evade the clear course of duty that confronts me. I shall ask the Congress... For broad executive power to wage war against the emergency, as great as the power that would be given to me if I were in fact invaded by a foreign foe... I pledge you, I pledge myself to a New Deal for the American people.”
In summing up the economic accomplishments of the New Deal, one can conclude that the New Deal can be regarded as an attempt to alter the social structure of accumulation in three ways:
1) The New Deal was an attempt to make the system work in certain areas in which it had failed.The stock market crash, the farm disaster, the bank failures, and massive unemployment are some of the major areas that needed government intervention to succeed again. The New Deal sought to make improvements to business systems so they would succeed, not to replace them with new systems.
2) The New Deal was an effort to create a new relation between government and its citizens in economic life.
Before industrialization, the belief that prevailed throughout the years of American economic growth had been that the best guardian for each able-bodied citizen was himself. The practical basis for rugged individualism had gone with the industrialization and urbanization of America. The New Deal was not an effort to make people dependent on government for security in case of an
economic crisis; it was a response to a situation in which no other solution was possible.
3) The New Deal was an effort to renew growth, not merely by repairing the weaknesses of the nation’s financial and farm sectors, but by using the government as a means of spending to supplement the degenerate expenditure of private investment.
Initially, the idea of a large and aggressive program of public spending as a way of swelling the nation’s output was a foreign idea to FDR. What was different about FDR and the New Deal was a sense of human urgency. He responded to this economic disaster (which most people who were suffering were not responsible for nor had any control over it) by hastily throwing together the collection of emergency programs that helped the suffering economy. When Pearl Harbor was bombed on December 7, 1941, most of the “bickering” about economic policy immediately halted, and the obvious step was to mount a massive war effort.
The economic worries of our nation were history. From an economic history perspective, WWII showed that government spending can indeed play a decisive role in creating economic expansion, just as private investment spending did in the past. The only concern then was whether growth could continue after the war. When the war ended, Harry Truman cautiously responded to the general demand for free economy, first ending wartime rationing, and then cutting taxes, before finally lifting all price controls except for rent.Prices for consumer goods skyrocketed, which predictably sparked demand for higher wages, which were denied, so the strikes came.
Management decided to negotiate settlements and pass along new costs to the customers. This began an upward
trend of wages and prices that has continued as a central inflationary mechanism until today. Thus the great boom ended in the great inflation, and the great inflation ended and the great stalemate. No economy has been able to bring about sustained economic growth without undesired inflationary consequences.To get rid of the inflationary tendencies from modern capitalism would require largely undoing it’s mixed and welfare character, which is doubtful because not many citizens would want to go back to government spending 10 to 20% from a 40% floor to GNP.
The more probable outcome appears to be the invention of new institutions and arrangements that will provide a limited but reliable protection against inflation. So what does the future have in store for capitalism in America? Again, we have to look back at our recent history in order to predict the future.This book thinks that useful explanations for the poor performance of the American economy is a two-fold failure of American capitalism to create a good working relationship with labor and an unwillingness to forge a national economic policy. In order for capitalism in America to resume a forward march, it would seem that the recruitment of labor’s cooperation (a socialist or labor political party) and the design of a coherent national economic policy to discover institutions for concentrating and directing economic strength into high growth industries and away from declining ones.
Lastly it would be ignorant to expect that the present state of uncertainty an incompletion will be quickly overcome. More likely it will take many years of trial and error, partial success and partial failure. We’ll have to wait and see whether the United States
can overcome its present declining condition to become, once again, an adaptive and creative variant of the system whose time within world history does not yet seen to have run its course. NOTE: (From Page 12) "Those who ignore history are doomed to repeat it. " --George Santayana "The past is never dead. It's not even past.
" -William Faulkner "History is indeed the witness of the times, the light of truth. " --Cicero There were a few times that I read something in this book that made me stop and think about these quotes. For example: Right after the stock market crashed in 1929: “Despite countless assurances by businessmen that things were fundamentally sound, things were not fundamentally sound. Nowhere was this truer than in the banking industry. Banks were up to their years in the very unsound business of lending money for security purchases; and when the market fell the lending banks were gravy a slick stricken.In addition, banks not only foisted all manner of unsound securities on the public but became convinced of the value of those very same investments and bought them themselves... Pence one terrible consequence of the crash was that it toppled many banks whose failure in turn toppled other businesses. By 1932, 4,835 banks had closed their doors.
Between 1929 and 1933, over nine million savings accounts were lost and countless businesses went bankrupt because they could not get their money out of the banks. ”All that I keep thinking as I read this passage was, “Those who ignore the mistakes of history are doomed to repeat them. ” I would imagine that a prerequisite to work in the Banking/Finance
industry would be: to learn all of the causes of financial crises in the last 500 years; what did/did not work to solve the problem after it was widespread; and what could have been done before-hand to possibly avoid it or at least lessen the crisis’ effects. It does not make any sense to me why we are still having financial crisis that have pessimists talking about another Great Depression.
Obviously, the market will always be cyclical, to some extent, but it just seems like all of this could have been avoided by a little common sense, a week-long history class, knowing that if you (as the head of a financial services firm) got greedy and tried to better yourself without analyzing the amount of risk involved in a transaction for your client, that the boss-man WOULD be held accountable for his actions. I could go on and on, but I think you get the point.
- Thomas Mun. “England’s Treasure by Forraign Trade. ” 1630.
- Douglass C.North. The Economic Growth of the United States, 1790-1860. 1961.
- P. L. Ford. The Writings of Thomas Jefferson. New York: 1893.
- Carter Goodrich. Government Promotion of American Canals and Railroads, 1800-1890. New York: Columbia University Press, 1960.
- W.J. Ghent. Our Benevolent Feudalism. New York: The Macmillan Company, 1902.
- Andrew Carnegie. Autobiography of Andrew Carnegie. New York: Houghton Mifflin Company, 1930.
- James Rachels. Created from Animals:The Moral Implications of Darwinism. United Kingdom: Oxford University Press, 1991.
- Stephen T. Asma. “The New Social Darwinism: Deserving Your Destitution. ” The Humanist, Vol. 53 September-October 1993:3.
- Thomas Cochran. “Railroad Leaders 1845-1890: The Business Mind in Action. ” The Economic History Review, New Series,
Vol. 8, No. 2 1955: 248-250.
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