Economic History of the United States
Economic History of the United States ECON 4524
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World War II and the US Economy Sept 16 1940 Selective Service Act establishing a draft Oct 1941 only 1 in 5 Americans favored going to war The Costs of War 10 times as costly in real terms as WWI 4 years vs 15 years 40 of GDP 12 million men mostly conscripts 5fold increase in debt 1941 50 billion to 1945 250 billion 6fold increase in taxation 1941 71 billion 1945 445 billion over 1000000 casualties 400000 dead 670000 wounded 154 agencies created most powerful War Planning Board and Office of Price Administration 150000 employees by 1945 Did World War 11 bring us out of the Great Depression Conventional wisdom war is good for the economy Good for employment not good for consumption How much utility do you get from a Sherman tank Some National Income accounting YCIGX M Each of the components supposedly measures output of FINAL goods and services at MARKET prices Some problems with government and particularly War expenditures 1 Double counting of intermediate goods GDP does not separately count steel and automobiles Why This would double count the steel as it is already counted in the value of an automobile Is defense an intermediate or nal good 2 Government spending often does not pass through markets administrative pricing Value at price paid rather than market rate Some adjusted statistics Unemploy U U A Real per ment Armed Defense capita C Forces Employment 1939100 1940 146 154 176 1042 1941 99 125 206 1087 1942 47 11 327 1042 1943 19 156 424 1019 1944 12 183 416 102 1945 19 191 405 1068 1946 115 1261 Higgs the recovery from the Great Depression did not begin until the end of WWII pent up consumption brought us out of the Depression Increase in consumption above 1929 levels only from 1946 405000 dead and 671000 wounded is not prosperity Some other aspects of the United States Wartime economy Labor force female participation rates high in WWI interwar period back to normal Again high in WWII has trended upward since WWII Investment Pentup savings during WWII high levels of investment and consumption after WWII The consumer society qualitative change after WWII Affordable housing Increased ownership of consumer durables ex televisions Over 85 of US housing stock built after WWII Distribution of income the great compression Price and other administrative controls OPA employed over 150000 people 194345 control over essentials food fuel etc and goods that could be procured for the war effort steel amp transport Longterm legacy Belief in ability of government to control the economy 1946 passage of Full Employment Act Keynesian fiscal policy Selective Service Act of 1948 peacetime draft Expansion of the tax revenue machine low exemptions high rates progressive rates tax withholding Veterans benefits GI Bill Cold War 3 trillion dollars 19451990 Military Industrial Political Complex Business gains some regions gain military bases and associated spending taxpayers pay Post communist threat military spending 2003 US spends more on defense than the next 12 highest spenders combined Railroads and Economics Growth Railroads followed steamboats and canals for lowering transportation costs 1830 30 miles By 1839 3000 miles of track mostly passenger rail between major cities 1850 9000 miles 1860 30000 miles 1915 291231 miles Building very procyclical 186573 187883 188587 Mileage not sole indicator 1 Civil War freight car carried max of 12 tons 2 WWI freight car carried 70 tons 3 Locomotive in Civil War could pull 25 cars 4 Locomotive by WWI could pull up to 100 cars Why these advances 1 stronger rails 2 stronger wheels and axles 3 better and safer boilers 4 Westinghouse brake 5 specialized rolling stock refrigerated cars cattle cars grain cars Pullman luxury cars Bene ts of Railroads over canalriver network Enabled regional specialization rail routes more direct than rivers open all year faster Safer reduced loading and unloading ashBMNb t Were Railroads indispensable for economic growth Concept of social saving What was the addition to GNP from having the railroad instead of next best alternative wagons rivers canals and bigger inventories 1 Looking at only rates canals were cheaper but canals i slower ii more damage inferred from insurance iii waterways froze 2 Railroads saved most from the alternative of wagon rates Overall result in 1890 our total GNP was 5 larger than it would have been without railroads Caveats px only looked at major ag commodities ignored fresh fruit and vegetables and their impact on health specialization could not have been as great ignored passenger component consumption and production migration much easier because of lower cost of possible return MN 5 Is social savings the best way to look at railroad benefits Social rate of return was in the range of 15 Railroad consumed 18 of total capital Was their an alternative investment that could have absorbed that amount of capital with that rate of return Bottom line still correct we would have had economic growth in the absence of the railroad Were railroads were built ahead of demand Probably not though as people expected the railroad to come they moved ahead of the railroads All major rail lines were profitable Concept of railroad making a location viable lead to subsidies local state and nally federal for the transcontinental railroad Federal Government Aid 1862 Congress chartered Union Pacific to go from Nebraska West Central Pacific to go from California East Land Grants 130 million acres in checkerboard to railroad companies Corruption associated with railroads Credit Mobilier scandal of 1873 Credit Mobilier was a tightly held building company composed of railroad magnates Union Pacific paid Credit Mobilier to build rr in ated costs Instead of profits going to shareholders the profits went to Credit Mobilier Alternative Methods of Government Finance 1 Government could build the road and then sell to private party at loss if necessary Problem government management might not be as costeffective 2 Government could have guaranteed a rate of return incentive to in ate costs 3 Government could have offered loans in 1860 no probable takers The Economics of the Civil War Issue is war good for the economy Human Capital Lost more than 600000 deaths 500000 casualties 9 of male population between the ages of 15 and 39 World War 1 117000 dead World War 405000 dead Gettysburg 43000 killed or wounded in area about 3 times the size of campus 1870 1A of the Mississippi budget was spent on arti cial limbs Total Financial Cost 67 billion 4 times the total government expenditures from 17891860 The costs of the civil War permanent loss given economy was at full employment Government expenditures Undercounted labor costs associated wdraft conscripts paid less than market wage Destruction of physical capital Human capital lost reduced future productivity because of death and injury The nancial cost to the North Direct government expenditures 34 billion From pure economic selfinterest it did not make sense to go to war slavery cheap cotton lack of competition for jobs labor movement was proslavery The nancial cost the white South 33 billion Confederate Financing Debt In ation and Taxes War consumed 12 of Southern income per year Taxes 12 free rider problem in Confederacy Money Supply stock increased 11 fold eg what cost 1 cent in 1860 cost 1 in 1865 MV PQ Yankee Financing Debt In ation and Taxes Taxes 20 Debt 1860 65 million 1865 2680 million Why did the War occur The South feared that the North would gain control of Congress and pass an Abolition bill 1 capital loss 20 wealth range 42 for Alabama to 5 for Missouri 2 the productivity of cotton farming would decrease 3 South believed that secession would not be met with War For the North The right thing to do Why then Estimates of cost for War lost production not pain amp suffering lost companionship etc Total estimate 206 for every American in 1861 about twice annual consumption for 1860 Almost evenly divided between North and South North higher loss of life South greater destruction of physical capital Counterfactual could have purchased all the slaves at 1860 prices given each slave family forty acres and a mule and still had 35 billion left over Both sides underestimated the costs of war New weaponry but old tactics make war more costly in terms of lost lives Transportation costs fell easier to mobilize troops Rifling advances machine tool industry More deadly because economy was larger in principle everything past subsistence could go to war production BeardHacker thesis the Civil War destroyed the slavocracy Shifted the balance of political power from agriculture to industry War time economy stimulates manufacturing growth shift toward heavy industry Evidence not consistent 1 postbellum manufacturing productivity growth was similar to prebellum rates Average annual productivity growth rates per annum Year Manufacturin Overall s g Productivity Productivity 1840 78 46 59 1860 23 20 69 1870 60 44 99 2 NY and MA manufacturing centres decline in real output during War years 3 Immigration fell 4 railroad building fell 2 Wartime Legislation National Banking Act not a huge deal ie no central bank just stiffer requirements to become a bank Homestead Act perhaps prompted settlement where it should not have occurred overall no big boost to the economy Pacific Railway Act probably would have happened anyways Tariffs went up promoted industry but not growth All major changes redistribute income Slaves clearly better off The Rise of Big Business and Regulation 1870s the value of output in agriculture was greater than in manufacturing By 1890 the value of manufacturing output was 3X that of agriculture By 1914 American manufacturing output gt combined output of Britain France amp Germany Share of employment peaked at 27 in 1920 Transformation of American Manufacturing In 1860 most mfg output was produced in workshops Examples 20000 sawmills 14000 flour mills 7500 blacksmiths 3000 cart amp wagon makers These firms AVERAGED about 2 employees Why 1 high transportation costs encourage local production 2 natural resource availability 3 few economies of scale This began to change after the Civil War Example 1850 shoes were exclusively produced in workshops 1870 25 produced in factories What changed 1 Mass production economies of scale 2 Mass distribution improvements in communications and transportation telegraph and rail Industry Output in 1920 relative to 1860 Men s clothing 4 Iron and steel 25 Boots amp shoe 40 Meat packing 13 Causes Effect of new technologies amp processes increased capital intensity Continuous production American system of interchangeable parts Engineering capabilities machine power manufacturing processes ex Bessemer steel process Improving integration of capital markets Incorporation laws limited liability ease of merger How do small firms become giants Like people you can grow horizontally or vertically Vertical Integration control over various stages of production amp distribution process Question is make or buysell Problems of buying inputs quality of inputs timing of supplies Problems of selling quality of final product may include service eg sewing machines and meat pack in the late 19th century computers today Horizontal Integration 1 economies of scale 2 monopoly power Era of mfg pools cartels trusts and mergers 1 Mfg Pool purpose is to restrict output if D curve is inelastic TR goes up or divide and apportion the existing output a High water mark 1870s salt cutlery ra roads b based on voluntary compliance and little enforcement mechanisms so cheating and entry 2 Cartel International Pooling Agreement 1 Most famous is OPEC 19th century American Tobacco Co and Imperial Tobacco Co British carved up markets easier to enforce because of fewer players 4 some received legal status ocean shipping cartels are immune from antitrust N 03 3 Trusts high point mid 1880s until late 1890s a Stockholders in two or more firms deposit controlling portion of their stock in return for trust certificates in the hands of a trust who then controls all the companies b Many trusts Standard Oil 1882 Whiskey Distilling Sugar Refining Cottonoil Rope Producers 4 Merger Movement followed the EC Knight Sugar Trust Supreme Court Decision in 1894 mfg is not commerce and hence trusts are legal but so too are mergers 5 Merger Movement a result of court decision mere share and size does not indicate violation of the Sherman Act As companies grew larger there emerged fears about monopolies 1 monopoly rents it is not fair 2 political power government of the rich see political cartoon on page 366 in Hughes and Cain Reaction was Interstate Commerce Act 1887 dealt with railroads Meat Inspection Act 1891 Sherman Act 1890 antitrust and Clayton Act 1914 labor s Magna Carta The Sherman Act Every contract combination in the form of a trust or otherwise or conspiracy in restraint of trade or commerce among the several states or with foreign nations is hereby declared illegal 1 either private parties or Justice Dept may sue authorized court injunctions fines andor imprisonment injured party may recover treble damages left many openings for judicial interpretation N 4303 Early Applications of Sherman Act 1 N OJ 5 GNU l 1894 EC Knight Co controlled 95 of the Sugar market Court ruled in favor of EC Knight on the grounds that mfg is not commerce and mere size and share did not indicate a conspiracy in restraint of trade Pullman strike of 1894 court used the Sherman Act to force an end to the strike More explicitly in Danburry Hatters Case of 1908 Loewe v Lawler The combination the union described in the declaration is a combination in restraint of trade or commerce among several states in the sense those words are used in the Sherman Act Held members of the union financially responsible for the full amount of their personal property until 1901 only 18 federal suits Teddy Roosevelt the trust buster a 19 civil suits and 25 criminal suits a 1902 ordered suit against Northern Securities Co holding company of railroads successful in 1904 Taft 80 cases a Upheld 1911 lower court ruling of breakup of Standard Oil b Broke up American Tobacco Co c Rule of Reason principle still much discretion Was regulation in public interest or special interests 1 Public interest by preventing monopolistic behavior antitrust increases social welfare 2 Special interest by regulating larger more efficient firms antitrust acts as protection for small business harmed by creative destruction Impact of monopolist If economies of scale are sufficiently large consumers win with lower prices even though firm receives monopoly profits What is the counterfactual Small firms and high prices Regulated monopoly Unregulated monopoly Throughout the period of mergers and rise of big business prices fell What did Legislators state as their rationales for the Sherman Act Senator George MS chair of Judiciary Committee By use of this organized force of wealth and money the small men engaged in competition with them are crushed out and that is the great evil at which all this legislation ought to be directed Senator Sherman OH If we will not endure a king as a political power we should endure a king over the production transportation and sale of any of the necessaries of life If we would not submit to an emperor we should not submit to an autocrat of trade with power to prevent competition and to fix the price of any commodity Do these statements imply that the legislation was pro consumers Consumers are at a best a fragile constitutency Evidence that legislation was anticonsumer but pro small business 1 Votes on McKinley Tariff Act 1890 anticonsumer and Sherman Act 1890 142 members of the House voted identically and only 17 crossed votes 3 Meat Inspection Act of 1891 Public Interest health vs Special Interest ranchers small slaughter houses local butchers Special interests ranchers small slaughterhouses butchers and farmers were being driven out of business by large meat packers who reaped economies of scale and shipped refrigerated beef 1880 872 slaughterhouses and 80000 butchers Ratio of shipments of refrigerated beef to live cattle 1880 7 1882 17 1884 60 1885 82 Cattle prices had been falling during the same period so ranchers thought that packers had market power What did the act do Required inspection of beef that was shipped interstate reassuring consumers foreign and domestic that beef was safe Raised relative costs of large meatpackers because the small within state butchers and slaughterhouses not affected a Interest groups alleged that large meatpackers Swift Armour Hammond and Morris used diseased beef Incentive of major meat packers to use diseased beef 1 Just as a plane crash is bad for the airline business food poisoning is bad for the refrigerated beef industry 2 Meat packers had large specific assets and reputation mattered stockyards centralized slaughter houses and refrigerated cars 3 No evidence from newspaper accounts that people were getting food poisoning Appears issue was small guy being driven out of business like today s local pharmacist vs WalMart Further Regulation Clayton Act 1914 1 Prohibited predatory price cutting 2 prohibited tiein sales ie buy a copier and paper for the machine 3 stated that unions were not conspiracies in restraint of trade Labor s Magna Carta Federal Trade Commission 1914 1 injunctive power order business to cease illegal activities and can bring firms to court Entry into WWI ended antitrust movement until the New Deal Bottom line on regulation no fundamental change in competitive structure of American industry during this period The US and World War I War started in Europe in August 1914 US joined in April 1917 Background to US entering the War px By 1914 the US was the world leader in mfg N US gained new markets we acquired a huge trade surplus OJ Both Germany and Britain tried to blockade our goods 5 Britain blockaded German ports and seized cargo destined for neutral countries 5 Germany had a policy of unrestricted submarine warfare around British ports US Entry and siding with the British 1 people of English heritage in US positions of power 2 private loans 25billion to allies and 45 million to central powers 3 against war German and Irish Americans militant labor groups and pacifist elite groups Mobilization Manpower 1 4 million American men drafted 16 of labor force 2 117000 Americans killed 200000 wounded 3 European deaths Germany 2 million Russia 2 million France 1 million Britain 1 million 4 1918 in uenza kills 25 million ahead of AIDS as the worst disease of the 20th century Industry 1 2025 of US GDP to War effort total cost 355 billion 2 unprecedented government controls over the economy Nature of Government control July 1917 War Industries Board clearing house for government demands headed by Bernard Baruch Initially relied on voluntary cooperation over time more boards and regulation government wanted direct control Regulatory Boards heads came from the private sector 1 businessmenregulators believed that they would gain by collusion business always wants to get rid of competition 2 By the end of the War 5000 distinct boards National Food Administration Herbert Hoover head food rationing National Fuel Administration coal rationing Shipping Board began to build a navy Direct government control of railroads telephone and telegraph Price and wage controls conceal costs instead of taxes Why Regulate Belief that markets would not work fast enough Fed x vs the post office Price controls selective Controls were meant to be temporary Designed to prevent relative price increases in essential goods and war supplies Costs of controls 1 bureaucracy direct costs of implementation 2 black markets undermines civic society 3 inef ciencies if S ltD prices don t allocate resources ef ciently 4 rationing cost of waiting queuing 5 deterioration of product quality Growth of expenditure and taxes 1 Revenue before 1917 never gt 762 million 1920s never lt 3640 million 2 Expenditures before 1917 never gt 747 million during 1920s never lt 2800 million 3 National debt 1917 1 billion August 1919 266 billion Only half the increase can be explained by trend growth or in ation 4 After the war interest on debt exceeded cost of running the entire government prior to the war Total Financial Cost of the Great War 355 Billion including the 95 billion of loans to allies War nance taxes bonds and in ation 1 Taxes 13 of revenue raised by taxes Income tax adopted in 1913 rates 663 23 of total taxes War pro ts tax 1560 Excise tax on alcohol and luxury goods Taxes on public utility services Increased estate taxes 2 War loans liberty bonds 21 billion War Saving Certi cates of 5 denomination War Saving Stamps of 025 denomination 3 In ation Gold was owing in by 1919 we had 12 of the world supply Year M1 CPI 1913 154 42 1914 161 43 1915 171 43 1916 204 47 1917 239 55 1918 258 64 1919 303 74 1920 347 86 The Legacy of World War I Population became accustomed to government intervention we won the war therefore the strategy must have been right The postwar scaleback of controls was not complete Ratcheting upwards of government intervention Next crisis call in the government Economics of Slavery in the United States Slave Imports 1 666000 before the Congressional ban in 1808 2 US imported 7 of the total 10 million slaves imported to the Western Hemisphere 3 Brazil 36 Caribbean 40 Spanish America 17 4 Sugar drove the world slave trade 5 Tobacco drove the US market for slaves in the 18th century 6 Cotton drove the US market for slaves following the cotton gin 1793 7 US Cotton output 100000 bales 1801 to 5400000 bales 1859 8 Cotton far and away the largest foreign exchange earner Distribution and Growth of Slave Populations 1 Distribution in 1825 US 36 Brazil 31 Caribbean 21 and Spanish America 11 2 US had the highest rate of domestic population growth and the Caribbean the slowest 3 In 1860 US slave population almost 4 million representing 53 of the Southern population What was slavery Legally Property Morally absence of freedom 1 Unrestrained personal control of one group over another 2 Denial of economic opportunity 3 Denial of citizenship basic rights 4 Denial of cultural selfidenti cation The Pro tability of Slavery in the US 1 Historically slaves were as much a sign of wealth as a cause of wealth 2 If slavery was unpro table what should we observe i manumission the freeing of slaves was not common ii discouragement of births the debate is over how much encouragement existed 3 Calculating pro tability T 2 Output mantainance value of children 0 2 Price 1r i unpro table if value of children suf ciently negative or if maintenance exceeds the value of output ii price of prime field hand in today s dollars was roughly 3000040000 depending on index used for de ating iii despite upfront costs rate of return was about 10 greater than the return on relatively risk free government state bonds iv more profitable on larger farms economies of supervision in operating gangs shorter hours but greater intensity than free labor 4 Future profitability i at the time of the Civil War investors owners expected profits in the future in the 1850s the ratio of slave sale prices to slave rental prices increasing Profitability suggests that either war or compensated emancipation necessary for demise of slavery Until 1850s slavery was not politically contentious Why Balance Rule slave and free states admitted to union in pairs Incentive Structure Punishment vs Rewards 1 Rewards better jobs extra food rations right to work on own time pay manumission 2 Punishment whipping food deprivation solitary confinement public humiliation break up of family through sales Caveat no systematic quantitative evidence Consensus punishment or threat of punishment used frequently particularly for eld hands Why Pain capable of generating greater work effort but requires constant supervision Hence the greater efficiency from gangs Rewards generate care and creative work 1 used more for urban and skilled slaves eg iron forges 2 implications for long run viability of slavery if slavery is moving towards more skilled jobs The Demographics of Slavery px N OJ 5 U Mortality in the US less than in Caribbean or Latin America largely due to latitude Fertility rates in the US high for women who lived through childbearing years 50 avg of 924 children near the natural limit Encouragement of births but no clear evidence of breeding average age of slave women for first birth 21 years Average age for northern white farm women was 24 Slave families exslave narratives indicate that 23 lived in nuclear families but threat remained i breakups greater in the East because cotton expanding westward Treatment of Slaves Caveat wellbeing entails more than physical treatment freedom is essential for adult wellbeing i Adult diet adequate high in calories and nutrition pork beef milk and sweet potatoes ii Meat consumption 180 lbsyear for slaves Massachusetts workers 1873 121 lbsyear Parisians 1850 159 lbsyear British 1890 105 lbsyear Italians 1890 23 lbsyear iii Good nutrition result tall people US born slaves 672 inches Africanborn slaves 642 inches Cuban born slaves 636 inches Northern white males 682 tallest in the world at the time Literate higher class Frenchmen 653 inches British town artisans 665 inches Italians Northern Provinces 644 inches Italians Southern Provinces 63 inches Mortality rates for Adults equal for slaves and whites Slave infants and children malnourished Low birth rates 51 lbs Infant mortality 01 3501000 double the rate of whites infants moved quickly to solids and unsanitary formulas vi vii viii Child mortality 14 years 2011000 again double the rate of whites little meat for children unprofitable Child Heights short up to age 3 in the 0001 centile protein deficiency Malnourished children less aggressive Longterm effect surprisingly little on height implications for developing countries today Prenatal care poor Pregnant women worked long hours in the field 54 hoursweek during high season intense physical labor in stooped position harmful for fetal development Adequate treatment expected valuable capital asset Variability in care by owners the human element Situational Ethics How should we view behavior of blacks in bondage 1 Moral i Passive resistance and sabotage ii Hard work to capture the meager rewards for family 2 Amoral i Slaves responded to varying environmental factors no shame or pride in behavior 2 How we view cooperation versus resistance depends on specific atmosphere i Prison of war atmosphere non cooperation laudable ii Good master cooperation seems more reasonable environmental response The South after the Civil War The relative decline in Southern income 1860 white per capita income equal in North and South 18801900 income per capita in the South was about 50 of the North Year Total Manufacturing Agriculture 1860 100 100 100 1870 75 80 75 1880 118 141 115 It took the South twenty years to surpass where it was in 1860 yet in per capita terms it was 20 below 1860 Agriculture dominated the economy and within agriculture cotton was the dominant crop Year Price of cotton per bale 1865 043 1869 016 1870s 021 Total output recovered rather quickly by 1869 18701879 output 42 greater than prewar output Due to greater land and labor inputs little increase in productivity Remarkable considering 1 Natural Disarray following Emancipations In most of the British Colonies output fell spectacularly eg British Guiana and Jamaica sugar output fell 40 2 Proportion of black females fell from 90 to 40 prewar to 1880 3 War destroyed capital eg fences barns How did the freed slaves fare Slavery was poor preparation for freedom Why 1 poverty illiteracy lack of skills held back newly freed slaves 2 racist ideology that supported slavery remained long after emancipation 3 Freedman s Bureau mixed blessing run by white northern exsoldiers valued stability may have stifled competition some ideologically captured by Southern elite uh Incredibly high expectations 40 acres and a mule Literacy 1865 5 of adult blacks 1910 70 Effects 1 helped prevent cheating on accounts 2 necessary for skilled jobs Health Life Expectancy at Birth 1850s 32 1860 36 18601880 undoubtedly fell 1890s approximately 41 Income wealth and property Year Black White Income 1868 24 1900 35 1914 35 Property Ownership in the South 1865 close to 0 1880 20 of Black farmers owned the land 1900 27 Growth rates of Real Black Wealth in Georgia 18751892 9year 18931902 0 19021915 6year Note to achieve parity by WWI black income per capita would have had to grow at about 11 times the actual growth rate of white income Sources of persisting inequality 1 Land ownership 40 acres and a mule was not forthcoming Blacks started with very low ownership rates overall 22 of income comes from wealth land and capital 2 Education and information blacks had less schooling and little information about jobs in the North Illegal to have recruiters in the South Black relative to white school expenditures in 1910 Range 17 in LA to 75 DE 3 Occupational Discrimination unions and norms 4 Segregation ensured that this continued over time Illegal for out of state recruiters to enter many southern states 5 Blacks disproportionately lived in lowestwage regions 6 Regress in Civil Rights after 1890s WEB DuBois The South became an armed camp for intimidating black folk Jim Crow laws Lynchings averaged 111 per year in the 1890s No legal recourse if cheated Feedback effect incentive to stay in one s place discouraged human capital investment Sources of Economic Progress competitive markets and individual whites Dramatic Economic Progress awaited postworld war II Dramatic Political Progress awaited Brown vs Board of Education and Civil Rights and Voting Rights laws of the 1960s The Transformation of the American Economy 18701910 Output Real GDP growth per year about 4 By WWI we had a bigger economy than Great Britain Germany and France combined Population growth per year about 2 GDP per capita 2 per year Longest sustained period in growth of well being ie overall standard of living Shortrun was erratic a nancial or real economic panic every decade Depression of 1890s was huge Panic of 1893 Quesstimate of Unemployment 20 Over 50 of labor was selfemployed so of those at risk unemployment rates may have reached 40 in mfg No government welfare or unemployment compensation the rst time people began to question the capitalist system The Transformation of the Economy Percentage Distribution of Value of Commodity Output Year Ag Mfg Const Mining 1869 53 33 12 2 1874 46 39 12 2 1879 49 37 11 3 1884 41 44 12 3 1889 37 48 11 4 1894 32 53 11 4 1899 33 53 9 5 Data Summarize many changes New products how people were living and working eg bicycles sewing machines railroad network communications network telegraph and later telephone New or Rapidly expanding industries Petroleum 1859 2000 barrels 1904 117000000 Steel impact on railroads buildings bridges tunnels machines mining Electricity lightbulb in 1880 and central generating plants because of alternating current Daily newspapers because of rotary press from hand to 25000 copies in an hour Chemical fertilizers insecticides Distribution of the Labor Force AgMi Mfg Const Trade Trans 1870 54 19 6 10 2 1880 53 19 11 1890 45 19 13 5 7 1900 43 20 6 14 1910 34 22 5 14 IIBIRD O NO NQQOO Implications Capital deepening and productivity changes Rise of Service Sector Insurance Banking Urbanization 1860 6 million lived in cities greater than 2500 1910 42 million lived in cities greater than 2500 Urban Cities 2500 Cities 100 ths 1870 26 663 14 1880 28 939 20 1890 35 1348 28 1900 40 1737 38 1910 46 2262 49 Really big cities gt 1 million 1870 NYC 1910 NYC Chicago and Philadelphia Metropolitan Areas in 1910 NY 65 m Chicago 25 Philadelphia 2 Boston 15 Pittsburgh 1 St Louis San Francisco Detroit and Cleveland 5 to 1 No big cities in the South or Rockies Implications for Health Politics Education and Inventions Why do people bunch together given that bunching causes land prices to increase A theory for the nonexistence of cities 1 Homogeneous Plain assume away locational differences 2 Constant cost production technology mc curve flat 3 Perfect Competition If these assumptions held there would be no bunching up of resources and there would be costs land prices would rise and in a competitive world businesses would fail Why are the assumptions bad 1 Areas differ widely in topography climate fertility of soil mineralsso people congregate to exploit locational differences 2 Many production processes have economies of scale sufficient to overcome shipping costs ie no constant scale production and some barriers to entry 3 Agglomeration economies benefits that you derive from the existence of other industries and infrastructure Examples transportation between and within cities power generation water and sewer police and re protection proximity to inputs Urban growth occurred from new cities and existing cities getting bigger 1 New cities tradeoff between specialization economies of scale and transportation Many new cities were regional commercial centers doctors lawyers 2 Old cities got really big economies of scale and agglomeration economies Urban Mfg Core Boston to Baltimore Baltimore to St Louis St Louis to Minneapolis and Minneapolis to Boston 70 of Mfg by World War I Why Isn t the Whole World Wealthy Technology Easily copied through reverse engineering Capital Shortage Evidence indicates that poor countries have far less capital and investment than rich countries Natural Resources Generally resource rich countries are richer Australia Canada but there are many exceptions Bad Institutions Institutions are the rules of the game that determine economic incentives Formal Institutions Laws Courts Informal Institutions Culture Norms The Institution of Private Property Rights The right to use an asset The right to derive an income from the asset The right to sell an asset The right to bequeath an asset The right to exclude others from using an asset Enforcement of Private Property Rights Government Policing of laws and judicial enforcement civil and criminal Private enforcement locks on our doors alarms private policing eg neighborhood patrols c Norms Social ostracism guilt or shame Why do private property rights matter Incentive to retain and enhance the value of assets Promotes trade specialization and voluntary trade creates wealth Trade establishes prices Role of prices in an economy signal to producers and consumers about allocating resources In the present and future i Consumers respond to high prices by conserving resources ii Producers respond to high prices by developing new technologies to create substitutes and reduce costs Why do private property rights matter Incentive to invest Provides security that individual investors will reap the returns of their investment Ability to invest Most investors need to borrow to finance their investment Secure property provides collateral Ex farmers wanting to buy new equipment may borrow against their farm parents may take a second mortgage to finance youreduca on Private property rights versus the commons The keg or shrimp bowl at a party versus your at home consumption Fisheries The George s Bank and other ocean fisheries property rights assigned upon capture Effect bigger and bigger boats expensive equipment near total depletion of the cod stocks Air far too much pollution from a social standpoint Tradable permits establishes a market for the right to pollute Incentive to trade and develop new technologies Oil production US law property right assigned to surface owner Result too much drilling Private Property Rights and Economic Development Market economies versus Soviet bloc East and West Germany or North and South Korea Land Reform in Latin America Modern economic growth began in England Why Glorious Revolution and accountable government Growth Promoting Institutions in the US Separation of powers checks and balances Federalism allows experimentation Independent judiciary affects beliefs in the system Common law evolutionary Belief in land of opportunity concept Country Stores in the South and Debt Peonage PreCivil War Financial Intermediation Cotton factors lent money to plantation owners PostBellum Financial Intermediation Banks increasing lent to plantation owners but in addition country merchants lent to sharecroppers and tenants base on the value of the crop ie a crop lien Possible Criticisms 1 Merchants coerced farmers into growing too much cotton at the expense of corn Why Better collateral easier to store Increased dependence Rebuttal i Merchants would be best off by having farmers produce the profit maximizing mix of cotton and corn and then extracting the surplus above subsistence You need more than corn to be selfsufficient ii If merchants forced a nonprofit max mix of crops they would be harming the landlord as well this is not plausible given who was economically and politically more powerful eg crop liens were legally secondary to the rent 2 Merchants charged exorbitant interest rates because of their monopoly power approximately 60 Rebuttal i entry costs were low over 8000 country merchants ii rural banks charged about 28 3 Merchants kept sharecroppers and tenants in debt peonage Rebuttal i real debt is costly you are giving away resources ii merchants limited debts iii evidence when prices and crop were low farmers fell into debt and when prices and crops rose farmers got out of debt iv if debts to high running away was a viable option The Rise of Big Government Federal State and Local GovernmentGDP 1900 696 1925 1096 1940 1996 1944 4896 1950 2396 1960 2996 1970 3396 1980 3696 1990 3596 2000 2896 2002 3096 Private Investment as of Federal Expenditures 1929 500 1990 62 1997 71 2002 80 Government Debt 17761975 544 billion 19751990 3 trillion 1990 2002 64 trillion Federal State and Local EmployeesNonAg Civilian Employees Force 1960 15 1970 18 1980 18 1990 17 2000 16 Federal Big ticket items as of Federal Government Expenditures 2002 Defense 17 Social Security 22 Medicare 12 Welfare 15 Health 12 Interest on the Debt 8 These represent 86 of the federal budget Expenditures as share of Federal State and Local Expenditures Quantitative Measures Insufficient Regulations do not show up fully in federal expenditures Recent Estimate of Regulatory Costs We pay as much for regulations in higher prices for goods and services as we pay in income taxes Government is doing more of what it traditionally did scale and engages in more activities scope Why Demand Modernization 1 Creative Destruction quotlosersquot seeking protection special interests 2 Rent Seekers special interests 3 Externalities the environment 4 Ideology social security Supply 1 Committee System composed of preference outliers 2 Crises gives scope for government to grow and ratchet effect 3 Supreme Court ideological change Do we the citizens get what we want Impossible you can not get rid of friction in physics and you can not get what you want from government On the demand side of government 1 Because of the quotfreeriderquot problem special interests as opposed to consumerscitizens have a greater incentive to lobby for benefits from government 2 Citizens do not have an incentive to be fully informed rationally ignorant On the supply side of government 1 Because there are costs of monitoring politicians are able to engage in some legislative action that suits their ideological preferences at the expense of the preferences of their constituents 2 Seniority in Congress brings power Therefore it may not pay to quotvote the rascalquot out even if he does not vote in accordance with the preferences of his constituents 3 To the extent that committees have agenda control and politicians self select to committees we will get legislation that does not match of the preferences of Congress at large 4 Laws are administered through bureaucracies which creates a host of agency problems 5 Crises give politicians more scope to enact legislation that does not disappear once the crises are over Is all lost No Competition amongst politicians limits opportunistic behavior or malfeasance Competitive Media Newspapers Radio Television Internet The Roaring 20s America Comes of Age Aftermath of WWI no doubt that United States had become the leading economic power in the world What made the 20s roaring Economic Growth ordinary decade started with shortlived but deep recession and ended with the beginnings of the Great Depression Sectoral Prosperity No very high failure rates in farming and banking The first age of mass consumption diffusion of cars electricity household conveniences Sectoral Failures Bank failures in the 1920s 1920 28885 banks in the US 1929 23712 banks of banks in places with less than 4000 population fell by 27 Considerable regional variation 0 in NH to 12 of all banks in Montana What explains the failure rates 1 Agricultural distress farm foreclosures effect most failed banks lent to failed farms 2 Federal charters effect more efficient crowded out other banks 3 branch banking effect diversification specialization 4 Deposit insurance mixed effect prevents runs but increases risk taking 5 Population density effect implies economies of scale or greater diversification 6 Automobile ownership effect increased competition people can avoid weaker banks increasing the chance of failure Farm failures Interwar period had the highest farm failure rates on record from 1926 to 1940 100000 farms per year failed Year Failure rate per 1000 191320 32 192125 107 192640 20 194050 3 195060 17 19607 0 13 197 080 13 Why were failure rates so high 1920 drop in farm prices June 1920 to Dec 1921 Corn 185 bushel to 041 Wheat 258 to 092 But there was considerable regional variation in farm failures 1920s Plains and Southern States 1930s Midwest and Plains States What determined the failure rates 1 Earnings current and past 2 Urbanization proxy for offfarm opportunities 3 Increase in value 19201912 proxy for expost overly optimistic expectations 4 Increase in improved acreage 19201910 proxy for expost overly optimistic expectations 5 of farms mortgaged 6 Debtvalue 7 Government programs Government farm programs clearly rent seeking 1 AAA 1930s price supports artificially reduce supply 2 Federal credit Administration created federal land banks before 1933 longer payback period after 1933 lower interest rates amp refrained from foreclosing 3 State foreclosure moratoria 25 states reprieve of 3 months to 4 years Minnesota Moratorium Case Blaisdell vs Home Building and Loan Supreme Court Vote 5 to 4 in favor Majority Opinion while emergency does not create power emergency may furnish the occasion for the exercise of power the economic interests of the states may justify the exercise of its continuing and dominant protective powers notwithstanding interference with contracts Dissenting Opinion that the contract impairment clause denies to the several states the power to mitigate hard consequences resulting to debtors from financial or economic exigencies by the impairment of the obligation of contracts of indebtedness A candid consideration of the history and circumstances which led up to and accompanied the framing and adoption of this clause will demonstrate conclusively that it was framed and adopted with the specific and studied purpose of preventing legislation designed to relieve debtors especially in times of financial distress Indeed it is not probable that any other purpose was definitely in the minds of those who composed the framers convention or the ratifying state conventions which followed Justice Sutherland He simply closes his eyes to the necessary implications of the decision who fails to see in it the potentiality of future gradual but everadvancing encroachments upon the sanctity of private and public contracts The effect of the Minnesota legislation though serious enough in itself is of trivial significance compared with the far more serious and dangerous inroads upon the limitations of the Constitution which are almost certain to ensure as a consequence naturally following any step beyond the boundaries xed by that instrument Economic Plus side the farm crisis was temporary a moratorium gives sound farms breathing room until prices increase Political Plus side capitalism was at stake Economic Negative side banks won t make loans difficult to get into farming protects bad farmers The Age of Mass Consumption Automobiles Electric Flush Washing lights toilets machines 1920 26 35 20 8 1930 60 68 51 24 Why did mass consumption arise in the 1920s 1 Pentup demand from WWI 2 Changes in the production process costs per unit fell Fordism and the assembly line 3 End of mass migration increased wages for some 4 Increased wealth from the stock market boom i By 1929 28 of households owned stock ii stock prices had more than trebled since 1920 5 Increasing availability of consumer credit most radios and cars bought on credit 6 bandwagon effect goods like cars and radios need a critical mass to drive down costs there are high xed costs of production Monetary Factors and the Great Depression Friedman and Schwartz Money Stock 1 gt 13 MVPQ Works through interest rates and investment Collapse of money stock was i Due to inept Federal Reserve ii Entirely preventable The Federal Reserve System since 1919 12 Districts with an autonomous Federal Reserve Bank Federal Reserve Board Board of Governors of the Federal reserve from 1935 coordinating the system Powers Regulate banking system Rediscounting buying commercial paper from member banks Supervision of the banking system Ensure an elastic supply of currency open market operations Under Benjamin Strong s leadership the Fed learned that open market operations could be used to regulate the real economy monetary policy 1928 Death of Benjamin Strong change in goals of the Federal Reserve Goals of the Federal Reserve the early 1930s Maintaining the gold standard Preventing excess speculation stock boom of the 1920s bust of 1929 tightened money supply Some purge is healthy Result 1 N Bank Failures Unitbanking laws Contagion of fear bank holidays Effects Wealth of depositors stock holders Demand for narrow money Substitution of currency for deposits Further bank failure Run on bank sells assets asset priceJr further runs Credit contraction unwillingness to make loans tie up capital Effect on Investment 89 decline High real interest rates de ation Credit rationing Effect on confidence The International Gold Standard Characteristics 1 Free ow of gold mandatory convertibility 2 Fixed exchange rates 3 No international coordination mechanism If gold stocks are too low 2 reduce imports gt de ate Advantages 1 Price Stability 2 Exchange rate stability 3 Policy constraint Disadvantages 1 Asymmetry in obligation no penalty for hoarding 2 May prevent countercyclical policy 3 Difficult to maintain convertibility in crises GS Suspended in WW1 Resumption in 1920s at pre war rates 1 486 Changes in world economy UK exported gold from 1925 Golden Fetters France hoarded gold US Fed defended gold standard above all else Deflate in Nov 1931 amp in early 1933 Germany Defended gold standard Effect on external debts Forced to de ate Britain off gold in Nov 1931 Mild recovery No banking panics Monetary Policy in a nutshell 1 Oct 29Sept 31 allowed Ms to fall by 10 Oct 31Jan 32 raised discount rate Ms fell another 12 Defending the dollar and prevent gold out ow Believed Ms was sufficient banks held excess reserves 3 Feb 32Jan 33 mildly expansionary but banks opted for excess reserves 4 Jan 33March 33 Fed raised discount rate N Like fiscal policy monetary policy was never tried allowed Ms to fall 25 from 19291933 Why 1 belief in gold standard 2 belief that excess reserves signalled sufficient liquidity American Demography Births Deaths and Health Some population figures 1700 250000 1776 2500000 1860 31000000 1914 100000000 1999 250000000 How do we explain the trends Fertility and Mortality Births Earlier marriage in US than Europe in the 18th amp 19th centuries higher fertility 1800 birth rate near the natural limit 60 per 1000 1870 birth rate 40 per 1000 1915 birth rate 30 per 1000 Over time the birth rates have come down Why 1 Urbanization increased with the closing of frontier less cheap land Children less valuable in production Evidence post civil war Children were a net asset in the mid west Children in the frontier were a liability to age 6 but a net contributor by about 10 Children in the northeast were a net liability to 13 In rural areas children becoming less valuable in production mechanization 2 Infant mortality way down Normally do not have a second child while the first is nursing Delay between children increases with survival of a child Target family size if remained constant need fewer births 3 Later marriage from the late 19th century 4 Increasing divorce in the 20th century 4 Better contraception from the 20th century Death Rates increase in mortality 1820 to 1870 why Increase in urban population worse nutrition and disease environment Decline in Death Rates after Civil War 1850 life expectation for males 41 1915 life expectation for males 53 1870 Death Rate 23 per 1000 1915 Death Rate 15 per 1000 What killed folks early on Infectious Diseases Later heart disease and old age pneumonia Even later today add cancer Why did death rates fall Determinants of health 1 genetic changes in virulence of disease organisms perhaps accounts for 5 of decline scarlet fever and diphtheria 2 improved medical practice only in 20th century with antibiotics and improved knowledge 3 Improved nutrition and overall level of living market in uences Improved urban conditions sewerage reduced epidemics ex typhoid heating less crowding better transport fresh foods replacement of horses with motorized transport Improved rural conditions mostly nutrition due to income and lower transportation refrigerated rail cars 4 improvements in public health and regulation only urban government in uence late 19th Century better knowledge of disease transmission filtration of water dramatically affected deaths from Typhoid City Avg Death Rates Before Filtration After Filtration per 100000 Albany 109 28 Cinncinnati 56 11 Indianapolis 46 28 New Orleans 39 26 Pittsburgh 132 19 Washington DC 55 31 Weighted Avg 60 21 Remaining Problem lead pipes Fall in Mortality 74 0o 80 0o 39 0o 33 0o 8500 43 0o 6500 The Post Civil War Financial System To understand the period you need to start with the Civil War As in most wars the government has three ways to capture resources 1 taxes 2 borrowing 3 printing money Morally which is right who should pay for the war Existing Taxes went up and new taxes instituted Old taxes tariffs property taxes license taxes stamp taxes New taxes income tax and inheritance tax Taxes increased over the period 1862 10 of expenditures 1865 25 of expenditures After the Civil War government cut back on internal taxes but tariffs remained high Ratio of duties to value of taxed goods 1860 20 1865 4050 the ratio remained at a high level until 1913 Borrowing 1 Primary technique of government financing a rose from 90 million in 1861 to 2322 in 1866 unadjusted for inflation b sum was 2x what had been spent by investors to build railroads in 3 decades 2 sold bonds through private agent Jay Cooke a banker from Philadelphia 4 National Banking System 1863 to become a national bank had to have certain of assets as bonds Money Creation 1 In ation is a tax on holding money 2 U S government suspended convertibility in at the end of 1861 3 Legal Tender Act of 1862 print 150 million not redeemable greenbacks 4 mid 1862 print another 150 million mid 1863 print another 150 million 5 Price level during the war April 1861 Jan 1865 increased 23 times 6 Greenbacks at height of the war 285 greenbacks purchased a gold dollar Post Civil War Money and Prices 1 money stock de ned coin paper currency plus bank deposits 2 grew at a rate of 53 a year from 1867 to 1914 while wholesale prices declined at 13 per annum 3 quantity theory of money MVPQ GNP grew at 4 not 66 so velocity must have fallen Velocity of money decreased increase in money demand 1 for a given increase in money income need a larger increase in the stock of money 2 population increased 3 GNP increasing 4 Greater amount of market oriented activities 5 opportunity cost of holding money falls because money goes up in value in your wallet Why didn t we increase the stock of money Answer the economics of resumption Recall the United States government suspended payment in specie but rather than change The gold dollar price ie devalue they shrunk the money supply to get Greenbacks worth what they Used to be de ation A Brief History of Resumption 1866 Congress authorized Secretary of the Treasury McCulloch to implement monetary contraction de ation ie buy back greenbacks de ation was unpopular with whom Debtors 1 farmers 2 businessmen 1868 Contractionary monetary policy discontinued but silver coins no longer circulated because silver coins worth more as silver than the purchasing power of the coins The Crime of 1873 The Coinage Act of 1873 made the demonetization of silver of cial The mint would no longer buy silver in exchange for coins Financial Panic in 1873 Congress both houses passed a bill to expand the issue of greenbacks 1 bill vetoed by President Grant 2 organization of Greenback Party 1875 3 Greenback Party 1 of Presidential vote in 1876 4 1880 Greenback Party lost much of its force merged with another political group the free silver movement 1875 Resumption Act Congress declared that they would return to specie convertibility in 1879 In the later 1870s the demand for gold increased and the supply of silver increased Why 1 European countries went on the gold standard dumped silver on the market 2 New silver discoveries in the American West Consequence deflation price of gold up relative to goods Hurt farmers and mining interests Free Silver Movement Followed in the wake of the Greenback Party Free Silver Movement Wins Two Victories 1 Bland Allison Act of 1878 a 24 million silver purchased per month at market prices and some turned into coins b not enough to affect the money supply 2 Sherman Silver Purchase Act of 1890 a in return for supporting McKinley Tariff Bill raised tariffs 48 Congress passed alwa to purchase 45 million ounces of silver b caused monetary confusion and flight from silver people paid debts in silver gov t gold stock drained c problem 1893 gold stocks fell below 100 million and many feared a return to silver std fmancial panic d 1895 U S gov t went to J P Morgan to market U S bonds overseas gold owed in but this caused a bad public reaction because the gov t used private investment bankers Presidential Election of 1896 McKinley vs Bryan Bryan Thou shall not crucify man on a cross of gold 1896 started to emerge from depression and Bryan lost the election 1900 U S officially went on the gold standard Banking 1 1860 well over 2000 banks in operation a state chartered as well as private unincorporated 2 System changed with the establishment of the National Banking System why a captive market for U S bonds banks had to buy bonds equal to at least onethird their capital b banks deposit bonds with the Comptroller of the Currency and receive national bank notes 3 Reasonable idea that did not work a set minimum capital requirements which were too high for small towns b minimum reserve requirements for metropolitan area25 country banks 15 b prohibit loans on the basis of real estate capital c of state banks fell of national banks increased but not enough to offset the decrease d 1865 10 tax placed on state bank notes drove state bank notes out of existence but did not kill off state banks e state banks on the rebound number of state banks began to increase in increase in 1869 and of bank assets in 1870 4 Problem banking system susceptible to failures a bank panics usually happened at the peak of the business cycle b2 cycles important business 34 years and seasonal farmers spring marketers of crop fall c seasonal country banks draw down deposits they had made with city banks d city banks must lend less to meet deposit demands of country banks e business cycle demand to fuel stock market exchanges and commercial activity f ultimately what happened business failures and securities liquidation fall in price of stocks when people sense failure they run to banks for money process feeds on itself g major panics 1873 1884 1893 and 1907 Stimulus to Regulation following the Panics of 1893 and 1907 1 AldrichVreeland Act 1908 a temporary solution authorize emergency currency backed by loan and investment assets b establish National Monetary Commission which led to the passage of the Federal Reserve Act of 1913 and the Federal Reserve System The Federal Reserve System 12 Federal Reserve Banks New York Boston Philadelphia Richmond Atlanta Cleveland Dallas Chicago Minneapolis St Louis Kansas City and San Francisco No de jure central bank but de facto it was the governor of the New York Fed 1935 went to a true central bank with the headquarters in Washington DC and a Chairman of the Fed The Bottom Line How well did the Financial System Work 1 U S grew real GNP 4 per annum in spite of the system 2 Government did do the right thing by retiring Greenbacks did not crowd out private sector investment