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American Political Economy HA-20-3-10

 

By Tony Sanders

sanderstony@live.com

 

Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tossed to me:

I lift my lamp beside the golden door.

 

Inscription on the Statue of Liberty

 

I.                   Colonial Tobacco Money

II.                First Bank of the United States

III.             Second Bank of the United States

IV.             Democratic and Republican War Party

V.                Progressive Era

VI.             Federal Reserve

VII.          Hooverville

VIII.       New Deals

IX.             World War II

X.                Baby Boom

XI.             Oil Shock

XII.          Deregulation

XIII.       Great Recession

XIV.       Lessons for the Future

 

Fig. 1.1 Estimated Population of the American Colonies 1610-1780

Fig. 1.2 Value of Exports to and Imports from England by American Colonies and States 1700-1790

Fig. 1.3 American Tobacco Exported to England 1615-1695 and 1772 (in thousands of pounds)

Fig. 1.4 Tax Collections in America under Difference Revenue Laws 1765-1774 (in pounds sterling)

Fig. 1.5 Tea Imports from England by American Colonies 1761-1775 (in pounds)

Fig. 2.1 Area and Population of the United States 1790-1850

Fig. 2.2 National Wealth 1774-1807 (in millions of dollars)

Fig. 2.3 All Real and Personal Property in the United States (Exclusive of Louisiana Territory) 1805 (in millions)

Fig. 3.1 National Wealth 1825-1880 (in millions of dollars)

Fig. 3.2 Federal Budget and Debt 1820-1839 (in thousands of dollars)

Fig. 4.1 Slave and Free Population in the United States 1790-1870

Fig. 4.2 Individual Income Tax Collections 1863-1895 (in thousands of dollars)

Fig. 5.1 Voter Participation in Presidential Elections 1824-2008

Fig. 5.3 Federal Income Tax First and Top Bracket Rates 1913-2008

Fig. 5.4 Foreign Born and Native Population in the United States 1950-1990

Fig. 6.1 Federal Government Revenues by Source, Note Income Tax and Alcohol Excise, 1902-1934 (in millions of dollars)

Fig. 7.1 Depression's impact on the economy 1929 and 1933

Fig. 7.2 Depression's impact on people, Consumer spending on selected items, 1929 and 1933 (in billions of dollars)

Fig. 8.1 US Gross Domestic Product 1910-1960 (in billions of 2005 dollars)

Fig. 8.2 US Unemployment 1910-1960

Fig. 9.1 National Debt as % of GDP, 1929-1950

Fig. 10.1 U.S. Population Growth 1790-2000

Fig. 10.2 Total Revenues and Outlays as Percentage of GDP 1966 to 2007

Fig. 10.3 Health Expenditure as a % of the U.S. GDP 1965-2005

Fig. 11.1 Average Annual Inflation by Decade 1911-2003

Fig. 12.1 U.S. International Trade in Goods 1965-2005

Fig. 12.2 Federal Budget and U.S. International Trade Deficits 1980-1991 (in billions chained 2005 dollars)

Fig. 12.3 Effective Federal Tax Rates 1979 & 2000

Fig. 13.1 GDP Change from Previous Period, Annual and Quarterly 2000-2009

Fig. 13.2 Federal Budget and Debt 2000-2010 (in billions of dollars)

Fig. 13.3 Change in price of existing houses, 1984-2007

Fig. 13.4 International Trade in Goods and Services 2000-2009 (in billions of dollars)

Fig. 13.5 DJ Industrial Average 2005-2010

Fig. 14.1 Adult Correctional Population 1980-2008Bottom of Form

Fig. 14.2 Population Projections by Race 2008, 2050

Fig. 14.3 Top 10 National GDPs 2000-2050 (in billions of dollars)

Fig. 14.4 U.S. Net International Investment Position at Yearend 1989-2005

 

I.                   Colonial Tobacco Money

Ever since the first settlement of Europeans in the New World America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children.  An initial trickle swelled after the American Revolution and the establishment of the United States of America and became a flood in the nineteenth century, when million of people streamed across the Atlantic, and a smaller number across the Pacific, driven by misery and tyranny, and attracted by the promise of freedom and affluence (Friedman 80: 1).  The eastern shore of North America is a welcoming one.  A broad coastal plain made for easy settlement.  Peninsulas such as Cape Code and Delmarva, islands such as Long island, and the barrier beaches farther south provided shelter for the early sailing ships.  This vast area was not uninhabited.  There were approximately 250 languages being spoken in North America at the beginning of the European exploration, and about 2,000 in the Western Hemisphere as a whole.  Even within languages, the people of North America were divided into many small, often mutually hostile tribes.  Low-level warfare was chronic amongst these groups.  Less than 1 percent of the arable land of eastern North America was used for growing food crops.  Technologically the eastern Indians were Neolithic, using sophisticated tools but lacking metals.  Once the Indians became used to the superior metal tools, cloth and firearms of the Europeans, the skills needed to use the raw materials at hand began to disappear.  Before long, the Indians had no choice but to trade for what they needed on, losing their economic sovereignty.  Once that was gone, their political sovereignty and the rest of their culture soon followed (Gordon 04: 5-6).

Fig. 1.1 Estimated Population of the American Colonies 1610-1780

 

1610

1620

1630

1640

1650

1660

1670

1680

1690

Total

350

2,302

4,646

26,634

50,368

75,058

111,935

151,507

210,372

Negro

 

 

60

597

1,600

2,920

4,535

6,971

16,729

 

1700

1710

1720

1730

1740

1750

1760

1770

1780

Total

250,888

331,711

466,185

629,445

905,563

1,179,760

1,593,625

2,148,076

2,780,369

Negro

27,817

44,866

68,839

91,021

150,024

236,420

325,806

459,822

575,420

Source: Series Z 1-19 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1168

 

On his return from discovering America Columbus brought tobacco back to Europe and in the next century the habit spread rapidly in the Old world, and the cultivation of tobacco had begun to spread around the Mediterranean Basin.  The first permanent European settlement was founded by Captain John Smith in Jamestown on May 14, 1607 (Friedman 80: 252).  Life was hard, starvation and hostile natives were constant threats.  The local Indians of eastern Virginia were also addicted to tobacco but the variety they grew was not popular with the English colonists who preferred the tobacco produced by the Spanish in the West Indies.  Then in 1612 a man named John Rolfe brought some seeds he had obtained in Trinidad and planted them.  The grew abundantly in Virginia with the help of the local Indians and in 1616 he took the first commercial crop to England that was such a success they celebrated the first American Thanksgiving upon his return in 1617. (Gordon 04: 42)).  By 1616 the Virginia Company had transported more than seventeen hundred people to Virginia and invested the staggering sum of 50,000 pounds in its enterprise on the Chesapeake.  To make back their money the English turned to Nicotiana tabacum, tobacco.  The first law passed by the first General Assembly of Virginia, July 31, 1619, twelve years after Captain John Smith landed and established at Jamestown the first permanent settlement in the New World, was in reference to tobacco.  It fixed the price of that staple at “three shilling the beste, and the second sorte at 18d. the pounde:.  Tobacco was already the local currency (Friedman 80: 250).  King James loathed tobacco, which he regarded as an instrumentality of the devil, and he wrote and published a pamphlet entitled A Counterblaste to Tobacco.  His subjects, however, paid no attention whatever to the royal opinion and smoking continued to increase in popularity (Gordon 04: 14-15).  At first slaves were not very common, due to the short life expectancy of immigrants, it was more profitable to hire indentured servants.  In 1650 there were only about three hundred slaves in Virginia, less than 2 percent of the population.  It would be the 1660s before black slavery was even formally recognized in Virginia law, and as late as the 1680s, indentured servants far outnumbered slaves.  The number of slaves doubled in the 1680s and doubled again in the next decade. (Gordon 04: 20).

 

Fig. 1.2 Value of Exports to and Imports from England by American Colonies and States 1700-1790

 

 

1700

1710

1720

1730

1740

Imports

344,341

293,695

319,702

536,860

813,382

Exports

395,021

249,814

468,188

572,585

718,416

 

1750

1760

1770

1780

1790

Imports

1,313,083

2,611,764

1,925,571

825,431

3,258,238

Exports

814,768

761,099

1,015,535

18,560

1,043,389

               Source: Series Z 213-226 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1177                                                                                                                                                                                           

 

British law effectively forbade the establishment of banks in the colonies and also forbade the export of British coinage from Britain, to preserve its own money supply.  With no banks, American colonies could not use banknotes.  This left the colonies to create a money supply as best they could.  Money is a commodity, no different from pork bellies, legal services, or computer keyboards except in one vital respect.  Money, by definition, is a commodity universally acceptable in exchange for every other commodity.   An amazing variety of items have been used as money at one time or another.  Cowrie shells and beads have been the most widely used forms of primitive money.  Metals, gold, silver, copper, iron, tin have been the most widely used forms among more advances economies before the victory of paper and the bookkeeper’s pen  (Friedman 80: 250).  Money serves two other functions besides acting as a medium of exchange.  It is a unit of account, that is, the value of all other commodities is expressed in terms of money.  And money acts as a store of value, a place to hold wealth temporarily between productive investments (Gordon 04: 43).  With the English embargo on exporting coins, the new English colonies in America had to solve the problem of getting a money supply another way.  In 1652 Massachusetts began minting its own coins despite strict laws forbidding anyone other than the royal mint to do so.  The pine tree shilling, the first coin minted in North America, was produced for people who brought their own silver.  The British did not suppress its production for thirty years. Other colonists turned to the Spanish dollar that probably accounted for half the coinage in circulation in the North American colonies.  In New Netherlands and elsewhere the fur trading Indians used wampum as a medium of exchange and so too did their Dutch and English speaking customers.  Wampum is beads made from the shells of the freshwater clams that abound in the local lakes and rivers, analogous to the cowrie shells used in Africa and Asia.  In 1760 however, J.C. Campbell of New Jersey opened a factory for making counterfeit wampum, destroying the value of the genuine article (Gordon 04: 44).

 

The most intriguing of all colonial money occurred in Maryland and Virginia where they resorted to what economists call “commodity money” using tobacco.  At various periods tobacco was declared the only legal currency.  It remained a basic money of Virginia and its neighboring colonies for close to two centuries, until well after the American Revolution.  It was the money that the colonists used to buy food, clothing, to pay taxes, even to pay for a bride.  As money goes, so tobacco went.  The original price set on it in terms of English money was higher than the cost of growing it, so planters set to with a will and produced more and more.  As always happens when the quantity of money increases more rapidly than the quantity of money increase more rapidly than the quantity of goods and services available for purchase, there was inflation.  One law after another was passed prohibiting certain classes of people from growing tobacco, providing for destroying part of the crop, prohibiting the planting of tobacco for one year.  Finally, people took matters into their own hands, banded together, and went around the countryside destroying tobacco plants.  The evil reached such proportions that in April 1684, the Assembly passed a law declaring that these malefactors had passed beyond the bounds of riot and that their aim was the subversion of the government.  It was enacted that if any persons to the number of eight or more should go about destroying tobacco plants, they should be adjudged traitors and suffer death.  Before the inflation ended about a century later, prices in term of tobacco had risen fortyfold.  In 1696 Virginia clergymen were paid sixteen thousand pounds of tobacco a year in salary (Friedman 80: 250-252).

 

Fig. 1.3 American Tobacco Exported to England 1615-1695 and 1772 (in thousands of pounds)

 

 

1615

1625

1635

1645

1655

1665

1675

1685

1695

1772

Total Exports

2.5

131.8

1,500

4,500

6,500

14,000

17,659

28,000

28,000

106,979

Source: Series Z 457-459 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1191

 

The tobacco currency vividly illustrates one of the oldest laws in economics, Gresham’s law, “bad money drives out good”.  The grower of tobacco, who had to pay taxes or other obligations fixed in terms of tobacco, understandably used the poorest quality tobacco to discharge obligations and retained the best quality for export in return for “hard” money.  Maryland in 1698 found it necessary to legislate against the fraud of packing trash in hogsheads that contained good tobacco on top.  Virginia adopted a similar measure in 1705, but apparently it did not offer relief.  The quality problem was somewhat alleviated when in 1727 tobacco notes were legalized.  These were in the nature of certificates of deposits issued by the inspectors.  They were declared by law current and payable for all tobacco debts within the warehouse district where they were issued.  Despite numerous abuses of the system, such receipts performed the office of currency right to the eve of the 19th century.  The general principles of tobacco money in Virginia remain relevant in the modern era, though paper money issued by government and bookkeeping entries called deposits have replaced commodities or warehouse receipts for commodities as the basic money of the society.  Rev. Weems, a Virginian writer, intimates that it would have done a man’s heart good to see the gallant young Virginians hastening to the waterside when a vessel arrived from London, each carrying a bundle of the best tobacco under his arm, and taking back with him a beautiful and virtuous young wife.  And another writer, quoting this passage, goes on to remark, “they must have been stalwart, as well as gallant, to hasten with a roll of tobacco weighing 100 to 150 pounds under the arm” (Friedman 80: 251-252).   

 

By the turn of the eighteenth century, the legislatures had established tobacco as the legal tender for paying taxes and public debts.  Legislation set standards for minimum quality.  In 1730 Virginia set up an inspection system, requiring planters to bring their tobacco to public warehouses where it would be inspected and warehouse receipts issued for its value.  These warehouse receipts functioned in the same way as banknotes, although they fluctuated in purchasing power far more, being tied to a volatile commodity, tobacco (Gordon 04: 45).  That did not stop them from issuing paper money in the form of bills of credit, promises to pay in the future.  Because they were legal tender in payment of taxes and other government obligations, they circulated as money, although often at a discount from face value.  The idea worked so well that it soon spread to other colonies in New England and to Pennsylvania, which issued its first paper money in 1723.  Benjamin Franklin, in 1729 when he was only twenty-three, published a pamphlet entitled “A Modest enquiry in the Nature and Necessity of Paper Currency.  He was soon rewarded with a contract to print future issues of Pennsylvania bills of credit and typically devised several means of foiling counterfeiters, some of them still in use to this day.  Franklin, however, minimized the fatal flaw inherent in what economists call “fiat money” money that is money only because the government says it is money rather than being made of or backed by a valuable commodity (Gordon 04: 46).  

 

Only 20 percent of all the royal governors in the whole of British America were American (Bernard 68: 89).  As absentees the Earls of Orkney and Albemarle in succession held the governorship of Virginia for no less than fifty-seven consecutive years, from 1697 to 1754, during which time seven individuals came and went in the deputized office of lieutenant governor.   The average duration of tenure of the fully appointed crown governors in the mainland colonies was five years, and of this period only the middle two or three years were effective politically, for a year or so was consumed at the start in consolidating power and an equivalent period of time was lost at the end when the incumbents were known as lame ducks (Bernard 68: 91).  Politics in America were profoundly different from politics in England in that it operated at two levels, the level of the provincial governments and the level of the central government at “home”.  Almost everyone who attempted to manipulate English politics to the advantage of political groups in the colonies found it necessary at one time or another to work through professional political brokers, lawyers, commonly, who commanded the recondite legal knowledge and the subtle political lore needed to thread the dark passages of English politics (Bernard 68: 92). The work of the British government was virtually restricted to preserving the constitution which meant doing nothing about home affairs and conducting foreign policy (Bernard 68: 104).

 

Most colonies sought to do no more than re-create, or adapt with minor variations, the forty-shilling freehold qualification that had prevailed in the county constituencies of England for 300 years.   But if ownership of land worth forty shillings a years was a restrictive qualification in England, it was permissive in the colonies where freehold tenure was almost universal among the white population.  Generalizing across the variety of statutory provisions and practices of the various colonies, it seems safe to say that fifty to seventy-five per cent of the adult male white population was entitled to vote – far more than could do so in England, and far more too, it appears, than wished to do so in the colonies themselves.  Apathy in elections was common, in part because of the physical difficulty of travel to polling places; in part because of the lack of real alternatives in a society dominated by the sense that the natural social leaders of society should the political leaders; in part because of the lack, in certain periods and places, of issues that seemed properly determinable at the polls (Bernard 68: 87-88).  Americans are famous for being practical people, preferring fact to theory, finding the meaning of propositions in results, regarding trial and error, not deductive logic, as the path to truth.  “In no country in the civilized world, “ wrote Tocqueville in Democracy in America, “is less attention paid to philosophy than in the United States...The ideas of Americans are either extremely minute and clear or extremely general and vague” (Schlesinger 99: 52).

 

In 1730 it was written in the New York Gazette that the even balance of authority resulting from the mutual dependence of the several parts of the English constitution is the most complete and regular constitution that has ever been contrived by the wisdom of man.  A free government cannot but be subject to parties, cabals and intrigues.  Parties are a check upon one another, and by keeping the ambition of one another within bounds, serve to maintain the public liberty.  Opposition is the life and soul of public zeal which, without it, would flag and decay for want of an opportunity to exert itself.  It may indeed proceed from wrong motives, but still it is necessary.  Not have the administration any reason to repine at it or to wish it at an end since whatever motives it may have proceeded from, it has proved of service both to them and to the public, even contrary perhaps to the design and intent of the authors of it.  There can be no liberty without faction, for the latter cannot be suppressed without introducing slavery in the place of the former.  Regard for liberty has always made me think that parties in a free state ought rather to be considered as an advantage to the public than an evil.  Because while they subsist I have viewed them as so many spies upon one another, ready to proclaim abroad and warn the public of any attack or encroachment upon the public liberty and thereby rouse the members thereof to asset those rights they are entitled to by the laws (Bernard 68: 127).

 

Fig. 1.4 Tax Collections in America under Difference Revenue Laws 1765-1774 (in pounds sterling)

 

 

1765

1770

1774

Total

17,383

33,367

27,995

Sugar Act

14,091

30,910

27,074

Stamp Act

3,292

---

---

Townshend Act

---

2,727

921

Navigation Act

2,964

1,828

672

Series: Z 611-615 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1200

 

By the mid-eighteenth century the political system, that had always been troubled and contentious, became explosive.  It invoked both the deeply bred belief that faction was seditious, a menace to government itself, and the fear that the government was corrupt and a threat to the survival of Liberty (Bernard 68: 105).  Starting in the 1760s King George III of Britain had imposed a number of onerous and unpopular laws and taxes on the American colonies including the Sugar Act and Currency Act of 1764; Stamp Act and Quartering Act of 1765, Tea Act of 1773 and 4 Intolerable Acts of 1774 (Sanders 09: 2.1).  As early as 1767 American politics had entered a new phase. By then the train of events that manifestly led to Independence were clearly visible – Stamp Act, Townshend Duties, the Boston Massacre.  The stamp tax was not a crushing tax; the Townshend duties, were withdrawn and the Boston Massacre was the result of a kind of urban riot common throughout the century, the Tea tax would have eliminated taxes on India Co. Tea lowering the cost of tea.  These events were incendiary, it was resentment of the economic oppression of colonialism that led to the overthrow of constituted authority and, ultimately, to Independence (Bernard 68: 159)   In response to this “taxation without representation” orators protested and many of the colonies wrote letters to Parliament and on December 17, 1773 a group of colonists dressed as Mohawk Indians threw three shiploads of tea into the Boston harbor and later Boston harbor was sealed off to punish the rebellious residents.  In 1774 fifty-six delegates from twelve of the thirteen colonies met briefly in Philadelphia for the First Continental Congress and drafted a Declaration of Rights and Grievances ruling Parliament unconstitutional (Sanders 09: 2.1).

 

Fig. 1.5 Tea Imports from England by American Colonies 1761-1775 (in pounds)

 

 

1761

1765

1770

1775

Total Tea Imports

56,110

518,424

110.386

22,198

Source: Series Z 473-480 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1192

 

The Founding Fathers had no doctrinal commitment to the unregulated marketplace.  They were not proponents of laissez-faire.  Their legacy was rather that blend of public and private initiative known in our own day as the mixed economy (Schlesinger 99: 223).  Early American corporations were quasi-public agencies, chartered individually by statute.  They were granted franchises, bounties, bond guarantees, rights of way, immunities and other exclusive privileges to enable them to serve specified public needs.  In many cases state governments bought shares in corporations and installed their representatives on the board of directors (Schlesinger 99: 225).  The key insight of Adam Smith’s Wealth of Nations of 1776 is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.  Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.  The price system is the mechanism that performs this task without central direction, without requiring people to speak to one another or to like one another.  The price system enables people to cooperate peacefully in one phase of their life while each one goes about his own business in respect of everything else (Friedman 80: 13).  The price system works so well, so efficiently, that we are not aware of it most of the time.  Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product – distribution of income (Friedman 80: 14).  If we will, from building a society that relies primarily on voluntary cooperation to organize both economic and other activity, a society that preserves and expands human freedom, that keeps government in its place, keeping it our servant and not letting it become our master (Friedman 80: 37).  Where does the government enter into this picture?  To some extent government is a form of voluntary cooperation, a way in which people choose to achieve some of their objectives through governmental entities because they believe that is the most effective means of achieving them (Friedman 80: 27).

 

II.                First Bank of the United States

 

The Founding Fathers were reared in an anti-party tradition.  The eighteenth century had little use for parties.  In France Rousseau condemned those “intriguing groups and partial association which by nourishing special interests, obscured the general will” (Schlesinger 99: 257).  The American experience exemplified the anti-party philosophy.  There were no parties in the colonial assemblies or in the Continental Congress or under the Articles of Confederation.  The Constitution made no provisions for parties.  Condemned by the Founding Fathers, unknown to the Constitution, political parties imperiously forced themselves into political life in the early years of the republic.  Their extra-constitutional presence rapidly acquired a quasi-constitutional legitimacy (Schlesinger 99: 258).  The parties as national associations were a force, against provincialism and separatism.  At the same time, they strengthened the fabric of unity by legitimizing the idea of political opposition.  Parties performed an equally vital function within the national government by supplying the means of overcoming one of the paradoxes of the Constitution –the doctrine of the separation of powers (Schlesinger 99: 259). British reformers are as dissatisfied with the fusion of powers as American reformers are with the separation of powers (Schlesinger 99: 307).  The first decennial census of the U.S. population was taken in 1790, as required by the Constitution, in order to obtain the population counts needed for Congressional apportionment (Campbell, Lennon 90).   

 

Fig. 2.1 Area and Population of the United States 1790-1850

 

 

1790

1800

1810

1820

1830

1840

1850

Land Area (square miles)

864,746

864,746

1,681,828

1,749,462

1,749,462

1,749,462

2,940,042

Population

3,929,214

5,308,484

7,239,881

9,638,453

12,866,020

17,069,458

23,191,876

Per square mile

4.5

6.1

4.3

5.5

7.5

9.8

7.9

Source: Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 1. Pg. A-8

 

After the Revolution, the American economy was in profound recession.  The country’s products were largely excluded from the British Empire, where most of its traditional markets had lain.  Its currency, to the extent that it even amounted to a currency, was nearly worthless, its government’s debts were unpaid and un-payable.  The importance that the Washington administration, which took office on April 30, 1789, placed on dealing with the financial situation confronting the government under the new Constitution can be judged by the numbers.  While the newly created State Department had five employees, the Treasury had forty.  A tax system had to be created, the debts from the Revolution had to be funded, the customs had to be organized to collect the duties that were to be the government’s main source of revenue for more than a century, the public credit had to be established so that the federal government could borrow when necessary.  The theoretical monetary system devised by the Continental Congress under the Articles of Confederation had to be implemented.  Thomas Jefferson, in his “Notes on the Establishment of a Money Unit” advocated not only using the dollar but making smaller units decimal fractions of the dollar, and the United States, in 1786, became the first country in the world to adopt a decimal system.  Jefferson advocated coinage of a half dollar, a fifth, a tenth, for which he coined the word dime, a twentieth and hundredth of a dollar, for which he borrowed the word cent from Robert Morris’s scheme.  In 1785 Congress declared that the “monetary unit of the United States of America shall be one dollar.” But the next year Congress, while adopting the cent, five-cent, dime and fifty-cent coins advocated by Jefferson, decided to authorize a quarter-dollar coin rather than a twenty-cent piece (Gordon 04: 68-70).

 

On September 11, 1789 Alexander Hamilton was confirmed by the Senate to be the first Treasury Secretary.  To fund the government Congress passed the Tariff and Tonnage Acts, that imposed a duty of 6 cents a ton on American ships entering U.S. ports and 50 cents a ton on foreign vessels, in the summer of 1789.  But, second only to slavery, the tariff would be the most contentious issue in Congress for the next hundred years.  With funding in place, Hamilton’s most pressing problem was to deal with the federal debt, most of which had fallen into the hands of speculators who had bought it for as little as 10 percent of its face value.  On January 14, 1790 Hamilton submitted to Congress his first “Report on the Public Credit” which called for redeeming the old debt on generous terms and issuing new bonds to pay for it, backed by the revenue from the tariff (Gordon 04:72-73).  The other part of Hamilton’s fiscal policy was the establishment of a central bank, to be called the Bank of the United States and modeled after the Bank of England as directed in his “Report on a National Bank”.  Hamilton expected the bank to carry out three functions.  First it would act as a depository for government funds and facilitate the transfer of them from one part of the country to another.  Second, it would be a source of loans to the federal government and to other banks.  And third, it would regulate the money supply by disciplining state-chartered banks (Gordon 04: 76).  Hamilton proposed a bank with a capitalization of $10 million, much larger than the combined capitalization of the three state banks of $2 million.  The government would hold 20 percent of the stock of the bank and have 20 percent of the seats on the board.  The secretary of the treasury would have the right to inspect its books at any time.  The bill passed Congress with little trouble.  Thomas Jefferson and his allies James Madison and Edmund Randolph, the attorney general, argued that the Constitution gave Congress the power only to pass laws “necessary and proper for carrying into Execution the foregoing Powers.”  The sale of stock was a resounding success, the bank was very profitable and the three state banks in existence in 1790 became twenty-nine by the turn of the century, and the United States enjoyed a more reliable money supply than most nations in Europe (Gordon 04: 78-79)

 

Fig. 2.2 National Wealth 1774-1807 (in millions of dollars)

 

 

1774

1784

1794

1800

1807

Total Wealth

600

850

1,950

2,400

2,518

Source: Series A 1 Historical Statistics of the United States

 

In 1791 the federal government enacted an excise tax on distilled spirits.  This was, of course, unpopular with the numerous producers of rum and whiskey, although they could, and did, pass the tax on to their customers.  In July 1794 opposition to the tax flared into insurrection, and five hundred armed men burned the house of General John Neville, who was the regional inspector of the excise.  On August 4 President Washington issued a proclamation ordering the rebels to disperse and militia to muster.  When negotiations failed, Washington ordered thirteen thousand troops into western Pennsylvania, whereupon the rebellion melted away and two leaders were captured and convicted of treason, before Washington pardoned them.  Today the so called Whiskey Rebellion is remembered mostly for being the only time in American history that the commander in chief has taken the field with his troops (Gordon 04: 99)  Road construction after the Revolutionary war was an important economic development.  Previously roads and Indian tracks were deeply rutted and often strewn with destroyed wagons.  In the early part of the nineteenth century a Scottish engineer named John McAdam would perfect the technology of road building using layers of stone and gravel.  The Philadelphia-Lancaster Turnpike was an immediate financial success for the company that built it, and this resulted in many turnpike projects getting under way.  In 1802 the act of Congress that created the state of Ohio set aside funds from the sale of public lands for road construction.  In 1811 a road from Cumberland, Maryland, on the Potomac, to Wheeling, in what is now West Virginia, on the Ohio River was authorized.  The Cumberland Road would eventually extend all the way to Vandalia, Illinois, a distance of nearly five hundred miles (Gordon 04: 100).  The need for canals to help develop the country and reduce the cost of many commodities in the New nation was obvious.  By 1790, the no fewer than thirty canal companies had been charted in eight of the thirteen states (Gordon 04: 103).

 

Fig. 2.3 All Real and Personal Property in the United States (Exclusive of Louisiana Territory) 1805 (in millions)

 

Total Valuation for 1805

2,505.5

1 million habitation and apparel for 6 million each $360

360

39 million acres of lands averaged at $6

234

150 million acres of land adjoining cultivated land averaged at $3 ½

525

451 million acres, residue, averaged at $2

902

Carriages and livestock $70 per family

70

Turnpike, canal and toll bridge stock

15

10,000 mills valued not less than $400

4

1 million slaves averaged at $200

200

Products on hand for export

26

Stock in trade

150

Public buildings, churches, arsenals, dock yards etc.

19.5

Source: Table 1 Historical Statistics of the United States

 

A real stock exchange was established in Philadelphia near the headquarters of the Bank of the United States in 1792.  In New York a group of twenty-one individual brokers and three firms signed an agreement, called the buttonwood Agreement because it was, at least according to tradition, signed beneath a buttonwood treat, today more commonly called a sycamore outside 68 Wall Street.  In it they pledged “ourselves to each other, that we will not buy or sell from this day for any person whatsoever any kind of Public Stock, at a less rate than one quarter per cent Commission on the specie value, and that we will give preference to each other in our negotiations”.  The new group formed by the brokers was far more a combination in restraint of trade and price-fixing scheme than a formal organization, but it proved to be a precursor of what today is called the New York Stock Exchange (Gordon 04: 79).  In 1817 the New York stock exchange was formally established.  Wall Street had been growing quickly but New York needed a stock exchange like Philadelphia had since 1792.  On February 25, 1817 several leading New York brokers met and drew up a constitution that was, in fact, nearly identical with the constitution of the Philadelphia exchange.  There were just twenty-eight original members of the Board of Brokers, who soon changed their name to the New York Stock and Exchange board.  They rented the second floor of the Bank of New York headquarters at 40 Wall Street for $200 a year, including heat.  They changed their name in 1863 to the New York Stock Exchange (Gordon 04: 111-112).

 

The Charter of the Bank of the United States had a term of twenty years and was due to run out in 1811.  By that time there were more than a hundred state banks in operation.  The Bank of the United States, headquartered in Philadelphia, had opened branches in New York, Boston, Baltimore and Charleston, the major American ports, within a year of its creation.  By 1810 it also had branches in Washington, New Orleans, Savannah, and Norfolk as well.  Its interstate branches and its monopoly on deposits of the federal government made it by far the most powerful bank in the country and the only one whose notes were accepted at par everywhere.  James Madison, who had opposed its creation was president, he recognized the bank’s utility both as agent for the federal government and as a provider of a uniform national currency.  His secretary of treasury, Albert Gallatin, also pushed hard to have the bank’s charter renewed.  The charter was due to expire on March 4, 1811 and the Madison administration submitted a bill to renew it for twenty years on January 24, 1811.  Madison however did not push hard enough, nor keep members of his administration in line, and when his vice president George Clinton of New York, broke a tie vote in the Senate against the bank bill, the measure died.  It was the most significant independent political, nearly the only one, in the history of the vice presidency.  Most of the branches were re-charted by the states where they were located and the headquarters were sold, building, furniture and all to Stephen Girard, a Philadelphia merchant (Gordon 04: 116-117).  With the extinction of the Bank of the United States, state banks proliferated, more than doubling in the two years after 1811.  Most issued banknotes.  Adam Smith had estimated that a bank could safely issue banknotes in the amount of five times capital, and some states restricted banknotes to three times capital, but other states placed no such limits (Gordon 04: 121).

 

III.             Second Bank of the United States

 

The Madison administration wanted a new central bank.  Madison vetoed one bill in 1815 on technical grounds, but signed a bill sent to him in 1816, chartering a Second Bank of the United States for twenty years (Gordon 04: 121).  In 1819 President Madison appointed Biddle to the board of directors of the Second Bank of the United States and in 1823 he became president of the bank, after the first president, William Jones resigned after an investigation of his speculation of bank stock.  But while the Second bank of the United States, headquartered in Philadelphia like the first one, would after a shaky start, be a stabilizing influence on the American monetary system, it would never have the power to control it that the first bank had.  Some states had sound banking laws.  Missouri, admitted to the Union in 1821 and Indiana, admitted to the Union in 1816, had single, state-owned, many-branched central banks of their own, a system that worked well.  Louisiana (1812) closely regulated its commercial banks and had a wide reputation for sound banking.  Illinois (1818) on the other hand, had an equally wide reputation for flimflam, fraud and failure among its banks.  Bank failure became endemic in this era.  Fully half the banks founded between 1810 and 1820 had failed by 1825.  Hundreds more sprang up (Gordon 04: 122).

 

Fig. 3.1 National Wealth 1825-1880 (in millions of dollars)

 

Year

Wealth

Year

Wealth

Year

Wealth

Year

Wealth

1880

43,300

1865

20,820

1851

7,981

1838

4,900

1879

41,437

1864

19,809

1850

7,135

1837

4,759

1878

39,430

1863

18,838

1849

6,918

1836

4,612

1877

37,579

1862

17,906

1848

6,707

1835

4,470

1876

35,794

1861

17,013

1847

6,501

1834

4,333

1875

34,074

1860

16,160

1846

6,302

1833

4,200

1874

32,420

1859

15,200

1845

6,109

1832

4,071

1873

30,831

1858

14,252

1844

5,922

1831

3,946

1872

29,308

1857

13,318

1843

5,739

1830

3,825

1871

27,851

1856

12,396

1842

5,563

1829

3,708

1870

26,460

1855

11,488

1841

5,392

1828

3,594

1869

25,253

1854

10,591

1840

5,226

1827

3,484

1868

24,086

1853

9,708

1839

5,066

1826

3,377

1867

22,958

1852

8,838

 

 

1825

3,273

1866

21,869

 

 

 

 

 

 

Source: Series A 2 Historical Statistics of the United States 1970

 

No one, had more influence on shaping the Democratic Party and its economic philosophy before Franklin Roosevelt than Andrew Jackson.  Indeed, the modern Democratic Party coalesced around Jackson’s extraordinary political personality.  Jackson believed in pushing the locus of power down to the social scale and had a deep-seated dislike of inherited privilege and what Jackson called “the money power” which is to say banks, especially large, well-established and powerful ones.  Jackson had been born very poor and had no intention of dying poor.  Andrew Jackson represented a revolution in American politics.  He did not have much formal education, but studied law in a law office and was admitted to the bar in 1887, he then became a land speculator and acquired hug tracts of land, he was then a general in the Indian war.  He fought no fewer than three duels, killing at least one of his opponents.  To Jackson real money was specie, gold and silver coins, paper money and what commercial paper, bills of exchange, promissory notes, bank checks, and such, were a form of fraud (Gordon 04: 124).  Andrew Jackson’s first order of financial business was to pay off the national debt.  The national debt, which had stood at over $80 million 1792, had been reduced to only $45 million by 1811.  The War of 1812 had then caused the debt to soar to more than $125 million by 1815.  The high tariff generated large surpluses after the war and by the time Jackson reached the presidency, it stood at $48,565,000 (Gordon 04: 125).  Jackson wanted to rid the country of debt for two reasons.  The first was that debt was bad in and of itself.  The second was to prevent a moneyed aristocracy from growing up around the administration.  To achieve his goal Jackson was perfectly willing to sacrifice internal improvements such as roads saying when the money was paid off there would be plenty of money for improvements.  By the end of 1834 Jackson was able to report to congress the State of the Union message that the country would be debt free on January 1, 1835 and have a balance on hand of $444,000.  Chief Justice Roger B. Taney not that it was “the first time in the history of nations that a large public debt has been entirely extinguished”. It remains the only time to this day (Gordon 04: 125). 

 

Fig. 3.2 Federal Budget and Debt 1820-1839 (in thousands of dollars)

 

Year

Revenues

Expenditures

Balance

Debt

Year

Revenues

Expenditures

Balance

Debt

1820

17,881

18,261

-380

91,016

1830

24,844

15,143

9,701

48,565

1821

14,573

15,811

-1,238

89,987

1831

28,527

15,248

13,279

39,123

1822

20,232

15,000

5,232

93,547

1832

31,866

17,289

14,577

24,322

1823

20,541

14,707

5,834

90,876

1833

33,948

23,018

10,930

7,012

1824

19,381

20,327

-946

90,270

1834

21,792

18,628

3,164

4,760

1825

21,841

15,857

5,984

83,788

1835

35,430

17,573

17,857

38

1826

25,260

17,036

8,224

81,054

1836

50,827

30,868

19,959

38

1827

22,966

16,139

6,824

73,987

1837

24,954

37,243

-12,289

337

1828

24,764

16,395

8,369

67,475

1838

26,303

33,865

-7,562

3,308

1829

24,828

15,203

9,625

58,421

1839

31,488

26,899

4,589

10,434

Source: Series Y 352-357 and Y 493-504 Historical Statistics of the United States 1970

 

In regards to the Second Bank of the United States, it was not an issue in the presidential campaign of 1824, when Jackson won a plurality of the popular vote, but lost in the House of Representatives to John Quincy Adams, or in 1828, when Jackson won a smashing victory over the unpopular Adams.  The President of the Bank Biddle voted for Jackson in both elections.  But hardly had Jackson entered the White house than his hatred of banks, especially large, powerful ones, manifested itself in his first message to Congress as president.  He raised the question of re-chartering the Second Bank of the United States a full seven years before its charger was due to expire.  By 1832, when Jackson ran for reelection, it was clear that he intended to kill the bank.  Biddle fought back as best he could.  Many congressmen enjoyed good relations with the bank and Biddle pressed them to pass a bill re-chartering the bank for fifteen years before congress adjourned for the summer of 1832.  Congress finally passed the re-charter bill and prepared to adjourn, but Jackson issued a blistering veto message that was as much a campaign speech as an act of statecraft.  He argued that the bank was a monopoly and favored the rich and powerful over the ordinary citizens of the country.  Further, despite Supreme Court rulings to the contrary, he declared it unconstitutional.  Congress was unable to override the veto (Gordon 04: 128).  When Jackson won a landslide victory that November, the Second Bank of the United States, although it had four years left on its charter, was at best a dead man walking.  Nor was Jackson content to simply allow the charter to expire.  He began to withdraw federal deposits and move them to what his opponents soon dubbed “pet banks” (Gordon 04: 128)

 

Although there was a brief dip in 1834 when the Second Bank of the United States called in its loans, prosperity was widespread and the number of banks in the country increased from 329 in 1829 to 788 in 1835.  The face value of banknotes tripled and outstanding loans quadrupled (Gordon 04: 127-128).  With the national debt paid off and the government running large surpluses, government revenues increased by 150 percent between 1834 and 1836, in part due to greatly increased land sales, Jackson convinced Congress to give it to state governments for improvements.  The prosperity however didn’t last long after Jackson.  In the Panic of 1837, faced with having their government deposits withdrawn the pet banks began to call in loans and a wave of bank failures swept across the west and rolled eastward.  The Bank of England raised interest rates to prevent an outflow of gold.  Wall Street plunged, interest rates, once 7 percent a year, were 2 or even 3 percent a month.  The American economy began to slide into a deep depression.  By early fall, 90 percent of the nation’s factories were closed.  Federal revenues fell by half.  Andrew Jackson’s successor, Martin van Buren, had to suffer the political consequences of the longest economic depression in the nation’s history, that didn’t reach bottom until February 1843, seventy-two months after it began.  Van Buren's remedy--continuing Jackson's deflationary policies--only deepened and prolonged the depression.  Declaring that the panic was due to recklessness in business and overexpansion of credit, Van Buren devoted himself to maintaining the solvency of the national Government. He opposed not only the creation of a new Bank of the United States but also the placing of Government funds in state banks. He fought for the establishment of an independent treasury system to handle Government transactions. As for Federal aid to internal improvements, he cut off expenditures so completely that the Government even sold the tools it had used on public works (Gordon 04: 130).

 

The first half of the nineteenth century was a story of industrialization and progress.  As cities grew in size in the first decades of the nineteenth century, the problem of supplying the inhabitants with water and disposing of sewage increased.  In the early years of the century the affluent had rain barrels or cisterns, fed from their rooftops, but the rest had to haul water from the nearest well.  This water was often grossly contaminated from the sewage from privies and the chamber pots that were emptied into the streets.  Although not understood at the time, this was the source of the frequent epidemics of such diseases as yellow fever and cholera that ravaged American cities at this time.  Philadelphia was the first city to build a modern water supply that could be piped into houses and allow waste to be disposed of through sewers.  In 1832 the first houses in America to be built with bathrooms were supplied by this system.  New York, surrounded by salt water, had a far more difficult technological problem to deal with.  Nonetheless, after building a forty-five mile long aqueduct to bring water in New York opened the Croton System on July 4, 1842.  The miracles of daily piled one upon the other in the first decades of the nineteenth century – railroads, telegraph, newspapers, heating, lighting, running water – inducing a mood of optimism and a belief in progress that had not been known before (Gordon 04: 166).

 

Believers in aristocracy and socialism share a faith in centralized rule, in rule by command rather than by voluntary cooperation.  They differ in who should rule, whether an elite determined by birth or experts supposedly chosen on merit.  Both proclaim, no doubt sincerely, that they wish to promote the well-being of the “general public” that they know what is in the “public interest” and how to attain it better than the ordinary person (Friedman 80: 97-98).  Alexis de Tocqueville, the famous French political philosopher and sociologist, in his classic Democracy in America, written after a lengthy visit in the 1830s, saw equality, not majority rule as the outstanding characteristic of America.  He wrote, “the aristocratic element has been feeble from its birth…The democratic principle, on the contrary, has gained so much strength by time, by events, and by legislation, as to have become not only predominant but all-powerful.  There is no family or corporate authority.  America, then, exhibits in her social state a most extraordinary phenomenon.  Men are there seen on a greater equality in point of fortune and intellect, or, in other words, more equal in their strength, than in any other country of the world…There is a manly and lawful passion for equality which incitement to wish to be powerful and honored…But there exists also in the human heart a depraved taster for equality, which impels the weak to attempt to lower the powerful to their own level, and reduces men to prefer equality in slavery to inequality with freedom.” (Friedman 80: 130-131).

 

IV.             The Democratic and Republican War Party

 

Shortly after the Revolution began, so too did the abolition of slavery.  Vermont, in declaring its own independence from Britain in 1777, also abolished slavery, becoming the first place in the Western Hemisphere to make the practice illegal.  Other northern states soon followed.  Even New York, with nineteen thousand slaves in 1790, about 5.5 percent of the population, began gradual emancipation in 1799 and had freed all its slaves by 1827.  The Northwest Ordinance of 1787 forbade slavery north of the Ohio River.  In the South, manumission became fashionable, and many planters, George Washington among them, freed their slaves upon their own deaths.  The Constitutional Convention, in 1787, found it necessary, in order to reach agreement, not only to forbid outlawing the slave trade prior to 1808, but to make that clause un-amendable.  But by 1808 public opinion, even in the South, had swung so against the trade that Congress abolished it as soon as it legally could so do, on January 1 of that year.  Abolishing the slave trade and actually suppressing were two different matters, however.  The invention of the cotton gin changed things.  After 1793 the price of a slave ratcheted upward.  A slave who would have sold for $300 before the cotton gin was selling for $2,000 and more by 1860.  The slave holders, possessed of an increasingly valuable asset, became more interested in preserving their “peculiar institution” and as tobacco became less important to the economy of such states as Virginia and Maryland, they began to sell surplus slaves south so that between 1790 and 1860 some 835,000 slaves were sold south.  While slavery was found throughout the South, it was not widely spread among the population.  In 1860, while the white population of the South was more than eight million, there were only 383,637 slave owners and only 2,292 held more than a hundred slaves.  But slavery had become bound up with the very identity of the South and its way of life (Gordon 04).

 

Fig. 4.1 Slave and Free Population in the United States 1790-1870

 

Year

Slaves

Free Blacks

Total Black

% Free Blacks

US Population

% black of US

1790

697,681

59,527

757,208

7.9%

3,929,214

19%

1800

893,602

108,435

1,002,037

10.8%

5,308,483

19%

1810

1,191,362

186,446

1,377,808

13.5%

7,239,881

19%

1820

1,538,022

233,634

1,771,656

13.2%

9,638,453

18%

1830

2.009,043

319,599

2,328,642

13.7%

12,860,702

18%

1840

2,487,355

386,293

2,873,648

13.4%

17,063,353

17%

1850

3,204,313

434,495

3,638,808

11.9%

23,191,876

16%

1860

3,953,760

488,070

4,441,830

11.0%

31,443,321

14%

1870

0

4,800,009

4,800,009

100%

38,558,371

13%

Source: Wikipedia

 

Worried over their growing minority status, and enraged over the attempt of the North to force emancipation upon Missouri when it applied for admission as a slave state in 1819, white southerners for the first time threatened secession during the debates that resulted in the Missouri Compromise of 1820. The heart of the compromise was the drawing of a line through the Louisiana Purchase territory that prohibited slavery north of the latitude 36°30′ and allowed it to the south.  President Andrew Jackson forced the Nullifiers to back down, but of greater concern in the 1830s to southerners anxious over the future of slavery was the sudden emergence of an abolitionist movement in the North.  When northern congressmen rallied behind the Wilmot Proviso in 1846 in an effort to bar slavery from any territories gained in the Mexican War, southerners formed their own sectional bloc and forced the ultimate defeat of the proviso.  The congressional Compromise of 1850, permitted California to enter the Union as a free state. The remaining land won in the Mexican War was divided into the territories of Utah and New Mexico with no conditions placed on the status of slavery. In 1854, the KansasNebraska Act reopened the entire controversy. In order to gain essential southern support for his bill organizing the remaining Louisiana Purchase territory north of 36°30′, Democratic senator Stephen A. Douglas of Illinois had to revoke the Missouri Compromise restriction on slavery.  The ruling of the Supreme Court in the Dred Scott decision of 1857 that Congress had no constitutional authority to prohibit slavery in the territory further polarized sectional attitudes, and northern Democrats led by Douglas lost the trust of the southern wing of the party when they joined Republicans in blocking the admission of Kansas as a slave state.  The decade came to a close with abolitionist John Brown's unsuccessful raid against the federal arsenal at Harpers Ferry, Virginia, in October 1859, for which he was hanged.

 

The Republican Party grew out of the conflicts regarding the expansion of slavery into the new Western territories. The stimulus for its founding was provided by the passage of the Kansas-Nebraska Act of 1854. That law repealed earlier compromises that had excluded slavery from the territories. The passage of this act served as the unifying agent for abolitionists and split the Democrats and the Whig party. "Anti-Nebraska" protest meetings spread rapidly through the country. Two such meetings were held in Ripon, Wis., on Feb. 28 and Mar. 20, 1854, and were attended by a group of abolitionist Free Soilers, Democrats, and Whigs. They decided to call themselves Republicans-because they professed to be political descendants of Thomas Jefferson's Democratic-Republican party. The name was formally adopted by a state convention held in Jackson, Mich., on July 6, 1854.  In the 1854 congressional elections 44 Republicans were elected to the House of Representatives and several were elected to the Senate and various state houses. In 1856, at the first Republican national convention, Sen. John C. Fremont was nominated for the presidency but was defeated by Democrat James Buchanan.  Two days after the inauguration of James Buchanan, the Supreme Court of the United States handed down the Dred Scott v. Sandford decision, which was denounced by the Republicans. The split in the Democratic party over the issue of slavery continued, and in 1858 the Republicans won control of the House of Representatives for the first time. 

 

The second Republican national convention in 1860 resulted in the presidential nomination of Abraham Lincoln. The Republican platform pledged not to extend slavery and called for enactment of free-homestead legislation, prompt establishment of a daily overland mail service, a transcontinental railroad, and support of the protective tariff. Lincoln was opposed by three major candidates-Stephen Douglas (Northern Democrat), John Cabell Breckinridge (Southern Democrat), and John Bell (Constitutional Union party). Lincoln received almost half a million votes more than Douglas, but won the election with only 39.8 percent of the popular vote.  Pushing the constitutional doctrine of states' rights to its logical extreme, the secessionists held that individual states retained ultimate sovereignty within the Union and could peacefully leave the Union the same way they had entered it through special state conventions.  South Carolina took the lead on 20 December 1860, and within six weeks seven states from the Lower South left the Union. Delegates from these states set up the provisional government of the Confederate States of America at Montgomery, Alabama, in February 1861 (Levine 1992).

 

The American Civil War was the largest war fought in the Western world in the century between the Battle of Waterloo, of June 18, 1815 and the outbreak of World War I on August 1, 1914.  Spread across half a continent, the troops moved by railroads and commanded by telegraph, the people informed by large-circulation newspapers, it was the first great conflict of the industrial era.  Because the Civil War was far more like the great conflicts of the twentieth century than such earlier struggles as the Napoleonic War, both sides faced demands on their government finances and the economies that supported them that no nation had faced before.  The fact that the North, with a far larger economy and a government fiscal system already in place, played no small part in the war’s eventual outcome.  Because of the depression that had started in 1857, the federal government had been operating in deficit since that time.  In 1860 the national debt stood at $64,844,000 and the Treasury was nearly depleted.  Since the demise of the Second Bank of the United State, the federal government had financed deficits mostly by borrowing from other banks.  To raise the money needed to fight the war they sold bond directly to citizens.  This was successful and by May 1864 the government was actually raising money as fast as the Navy and War Departments could spend it, $2 million a day.  The Northern bond sales caused a breathtaking rise in the national debt that had stood at 93 cents per person in 1857, before the depression hit, eight years later it stood at $75 per person.  Before the Civil War the United States government had never spent more in a single year than $74.2 million in 1858.  In 1865 alone it spent $1.297 billion, the first time in history that any nation had a billion dollar budget.  Since the Civil War the federal government has never spent less tan $236.9 million in 1878 (Gordon 04: 193-194).

 

Fig. 4.2 Individual Income Tax Collections 1863-1895 (in thousands of dollars)

 

Year

Amount

Year

Amount

Year

Amount

Year

Amount

1895

77

1874

139

1870

37,776

1866

72,982

1884

56

1873

5,062

1869

34,792

1865

60,979

1881

3

1872

14,437

1868

41,456

1864

20,295

1876

1

1871

19,153

1867

66,014

1863

2,742

Source: Table III Series Y 360-373 Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 2. Pg. 1091

 

In August 1861 the first American income tax was passed by Congress at the behest of then Secretary of Treasury, Salmon P. Chase, who would rule it unconstitutional ten years later from the Supreme Court.   It taxed all income, “whether derived from any kind of property, rents, interests, dividends, salaries, or from any trade, employment or vocation carried on in the United States or elsewhere, or from any source whatever”.  It originally called for a tax of 3 percent on incomes of more than $800, then a middle class income, rising to 5 percent on incomes of more than $10,000, a very comfortable income.  In 1864 the income on taxes in excess of $10,000 was doubled to 10 percent.  Virtually everything else was taxes as well.  Stamp taxes were imposed on legal documents and licenses, excise taxes on most commodities.  The tax on liquor reached $2.50 a gallon, when the price, untaxed, would have been about 20 cents.  The gross receipts of railroads, ferries, steamboats, and toll bridges were taxed. Advertising was taxed. The tariff was sharply increased.  Altogether the federal government raised fully 21 percent of its revenues by taxation.  The South, with its less developed and cash poor economy was able to raise only about 6 percent of its revenues by taxation (Gordon 04: 194).

 

To finance the war effort both North and South were forced to print money.  The consequences of issuing large quantities of what economists call fiat money, money that is money only because the government says it is money, are inevitable and were as well known then as now.  The first thing to happen is that Gresham’s law kicks in – good money, gold and silver, disappears into mattresses as people hoard it, while they spend the money perceived to be less valuable or trustworthy.  The second thing to happen is that inflation takes off.  As printing press money flooded the Southern economy, inflation increased more than 700 percent in the first two years of the war alone.  The North resorted to the printing press as well.  With congressional authorization the Treasury began issuing greenback, so called because they were printed in green ink on the reverse.  By 1965 the country had issued $450 million in greenbacks, amounting to about 11 percent of federal spending in those years.  While there was inflation it was kept to a manageable 75 percent or so.  Although the federal government had no hesitation in paying its bills with greenbacks, and requiring people to accept them by making them legal tender, the federal government itself did not accept them in payment of taxes.  Taxes and international trade had to be paid in gold (Gordon 04: 197).

 

During the Civil War industrialization expanded exponentially.  The demands of what became the largest army in the world and navy second only to Britain fueled the increase in production.  So did the tariff, which caused imports to drop dramatically.  In 1860 American imports had been valued at $354 million, two years later they were only $189 million, despite a quickly expanding economy.  The difference was made up by American manufactures.  In 1859 there had been 140,433 manufacturing firms in the United States, a decade later there would be 252,148.  The domestic production of iron railroad rails went from 205,000 tons in 1860 to 356,000 five years later to 620,000 tons in 1870.  The process for canning condensed milk patented in 1856 sparked a boom in the food processing industry (Gordon 04: 201).  During the entire colonial period there had been only 7 companies incorporated in the British North American colonies.  But in the last four years of the eighteenth century 335 businesses incorporated in the new United States.  Between 1800 and 1860 the state of Pennsylvania alone incorporated more than 2,000.  The corporation had numerous advantages over partnerships.  Partnerships ended with the death of a partner, whereas corporations could last forever.  Most important, corporation can sue, and be sued and buy, own, and sell property as an entity.  Chief Justice John Marshall described the corporation as “an artificial being that was invisible, intangible and existing only in contemplation of the law.” Corporations can also merge (Gordon 04: 229).

 

V.                Progressive Era

 

After the war, as a result of the new taxes and industrialization the government ran a string of twenty-eight straight surpluses beginning in 1866.  In the prosperous year of 1882, government revenues ran ahead of outlays by a staggering 36 percent.  By the turn of the century the huge Civil War debt had been cut by nearly two –thirds of in absolute dollars, and as a percent of GDP had dropped more steeply still, from about 50 percent to well under 10 percent.  The Civil War income tax had been cut in 1867 to a uniform 5 percent on incomes more than $1,000.  Three years later the rate was reduced again, and in 1872 the tax was eliminated altogether (Gordon 04: 272).  The expansion of the American railroads after the Civil War was nothing less than extraordinary.  With 30,626 miles of track in 1860, the United States already had a larger railroad system than any country in the world.  By 1870 it had 52,922 miles, in 1880, 93,262 miles, in 1890, 166,703 miles.  In 1900 it had 193,346 miles, a more than six-fold increase in forty years.  While the annual value of manufactured goods in the United States increased by seventeen times between 1865 and 1916, the annual freight ton-mileage of the railroads increased by thirty-five times.  By the turn of the century the railroads tightly knitted together an economy that was fully national in scope, and nearly every town of any size was served by a railroad.  The major cities were usually served by several (Gordon 04: 235). 

 

The greatest success story of this time was that of Andrew Carnegie who came from a poor family and worked his way up in the railway business and by 1880 Carnegie Steel Company dominated the steel industry. While the late-nineteenth century economy was built by steel, it was increasingly fueled by oil (Gordon 04: 247).  The prevailing practice in the most dynamic of industries at the turn of the century was not the rule of law but the rule of cliques of “robber barons” along with smaller time shady operators who manipulated the law to their own selfish ends with impunity (Starobin 2009).  In 1859, the year Edwin Drake drilled the first oil well American production amounted to only 2,000 barrels.  Ten years later it was 4.25 million and by 1900 American production would be nearly 60 million barrels.  In 1870 a firm named Rockefeller, Flagler and Andrews formed a new corporation, Standard Oil.  Capitalized at $1 million, at the time of its incorporation it owned 10 percent of the country’s oil refining capacity; by 1880 it would control 80 percent of a much larger industry.  As Standard Oil tightened its grip on the oil industry prices dropped as the company hoped to maximize profits by increasing demand (Gordon 04: 256).  When the Supreme Court ruled in, Wash Railway v. Illinois in 1886 that states had no power over railroads that were carrying goods across a state lines, the fight to regulate the railroads moved, to Washington.  After a year of intense political wrangling Congress established the Interstate Commerce Commission that was strengthened in 1890 by the Sherman Antitrust Act whereby , “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, hereby declared to be illegal” furthermore making it a crime to “monopolize, or combine or conspire to monopolize any part of the trade or commerce among the several states” (Gordon 04: 238). 

 

Monopoly grows out of the soil of free competition. There are three principal manifestations of monopoly capitalism.  Firstly, monopoly arose out of the concentration of production at a very high stage. Secondly, monopolies have stimulated the seizure of the most important sources of raw materials, especially for the basic and most highly cartelised industries in capitalist society: the coal and iron industries. Thirdly, monopoly has sprung from the banks. The banks have developed from modest middleman enterprises into the monopolists of finance capital. Some three to five of the biggest banks in each of the foremost capitalist countries have achieved the “personal link-up” between industrial and bank capital, and have concentrated in their hands the control of thousands upon thousands of millions which form the greater part of the capital and income of entire countries. A financial oligarchy, which throws a close network of dependence relationships over all the economic and political institutions of present-day bourgeois society without exception—such is the most striking manifestation of this monopoly (Lenin 17). Although the monopolies were very competitive with the competition they had a consumer friendly corporate philosophy (1) innovate constantly and invest heavily in the latest equipment and technology to drive down operating costs (2) always be the low-cost producer so as to remain profitable in bad economic times (3) retain most of the profits in good times to take advantage of opportunities in the bad times as less efficient competitors fail (Gordon 04: 247-248).

 

The immediate post Civil War years were, the golden age of American parties.  The veterans hadn’t yet forgotten how the Democratic Republican (DR) parties had divided the country and brought war and devastation to millions of people.  Flush with industrial contributions party regularity was higher, party loyalty deeper and party stability greater than at any other time in American history (Schlesinger 99: 260).  Third parties such as the Greenback party in 1880, the Anti-Monopoly party in 1884, the Labor party in 1888 and the Populist party in 1892 flourished (Schlesinger 99: 265).  In the nineteenth century visiting Europeans were awed by the popular obsession with politics.  Tocqueville in the 1830s thought politics “the only pleasure an American knows.”  Bryce half a century later found parties “organized far more elaborately in the United States than anywhere else in the world.”  Voting statistics justified transatlantic awe.  In no presidential election between the Civil War and the end of the century did the American turnout, the proportion of eligible voters actually voting, fall below 70 percent.  In 1876 it reached nearly 82 percent.  But in no presidential election since 1968 has the American turnout exceeded 55 percent.   In 1984, only 52.9 percent voted.  In the meantime, turnout in the once awed European democracies is over 75 percent in Great Britain and France, over 80 percent in west Germany, the Low Countries and Scandinavia, over 90 percent in Italy.  Currently the United States ranks twentieth among twenty-one democracies in turnout as a percentage of the voting-age population (only Switzerland is worse).  Fifty million additional American would have had to vote in 1984 to bring turnout back to nineteenth-century levels (Schlesinger 99: 256)

 

Fig. 5.1 Voter Participation in Presidential Elections 1824-2008

 

Year

1824

1828

1832

1836

1840

1844

1848

1852

1856

1860

1864

1868

1872

1876

1880

1884

1888

1892

1896

Turnout

26.9

57.6

55.4

57.8

80.2

78.9

72.7

69.6

78.9

81.2

73.8

78.1

71.3

81.8

79.4

77.5

79.3

74.7

79.3

Year

1900

1904

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

Turnout

73.2

65.2

65.4

58.8

61.6

49.2

48.9

56.9

56.9

61.0

62.5

55.9

53.0

63.3

60.6

64.0

61.7

60.6

55.2

Year

1976

1980

1984

1988

1992

1996

2000

2004

2008

 

 

 

 

 

 

 

 

 

 

Turnout

53.6

52.6

53.1

50.1

55.1

49.1

51.3

55.3

56.8

 

 

 

 

 

 

 

 

 

 

Source: Series Y 27-78 Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 2. Pg. 1071-1072; Info-please National Voter Turnout in Federal Elections 1960-2008

 

The gradual acceptance of the view that education ought to be a responsibility of the state is the most significant of the general trends of the nineteenth century.  This trend began in Prussia in 1808, and in France, under Napoleon, about the same time.  Britain was even later than the United States but finally in 1870, a system of government schools was established, though elementary education was not made compulsory until 1880 and fees were not generally abolished until 1891.  In 1920 local funds made up 83 percent of all revenues of public schools, federal grants less than 1 percent.  By 1940 the local share had fallen to 68 percent.  Currently it is less than one half.  The state provided most of the rest of the money, 16 percent in 1920, 30 percent in 1940, and currently more than 40 percent.  The federal government’s share is still small but growing rapidly, from less than 2 percent in 1940 to roughly 8 percent currently (Friedman 80: 155). At first schools were private and attendance strictly voluntary.  Increasingly, government came to play a larger role, first by contributing to financial support, later by establishing and administering government schools.  The fist compulsory attendance law was enacted by Massachusetts in 1852, but attendance did not become compulsory in all states until 1918.  Government control was primarily local until well into the twentieth century.  The neighborhood school, and control by the local school board, was the rule (Friedman 80: 150).  In his report for 1836 the superintendant of common schools of the State of New York asserted, “under any view of the subject it is reasonable to believe, that in the common schools, private schools and academies, the number of children actually receiving instruction is equal to the whole  number between five and sixteen years of age”.  Beginning in the 1840s, a campaign developed to replace the diverse and largely private system by a system of so-called free schools, ie. schools in which parents and others paid the cost indirectly by taxes rather than directly by fees (Friedman 80:155).

 

Because the United States had become very industrialized by the 1890s the depression that began in 1893 brought unparalleled hardships.  In 1860 there had been four farm workers for every factory worker, but by 1890 the ratio had dropped to two to one.  That meant that one American family in three was dependent on a regular paycheck for food, shelter and clothing (Gordon 04: 275).  Limited government The Populists said in their 1892 platform, “We believe that powers of government, in other words, of the people, should be expanded, to the end that oppression injustice and poverty shall eventually cease in the land” (Schlesinger 99: 236).  In the spring of 1893 the Philadelphia and Reading Railroad and the National Cordage Company declared themselves insolvent and panic swept Wall Street.  By the end of that year some fifteen thousand companies had failed, along with 491 banks.  The gross national product fell by 12 percent and unemployment rose rapidly from a mere 3 percent in 1892 to 18.4 percent two years later.  While before the term “unemployed” had applied to anyone without an occupation in 1878 a Massachusetts survey had redefined the term unemployed to mean, “men over eighteen who were out of work and seeking it” (Gordon 04: 265). 

 

When the great depression of 1893 struck and federal revenues plummeted there was a renewed call for an income tax.  With a Democrat, Grover Cleveland, in the White House, and Democratic majorities in both houses of Congress, a new income tax became law in 1894.  It was a very different tax in its impact than the Civil War income tax.  The latter had exempted only the poor.  The new tax, which called for a 2 percent tax on all incomes more than $4,000, exempted all but the rich.  Of the twelve million American households in 1894, only eighty-five thousand had incomes of $4,000 or more.  That was well under 1 percent of all households.  Republicans opposed the tax because it targeted a particular class of people, for that reason also Cleveland allowed the bill to become a law without his signature.  A case was immediately brought Pollack v. Farmers’ Loan and Trust generated enormous interest around the country.  Because of the intense public attention, the Court agreed to a rehearing of the case and Justice Howell Jackson, who was mortally ill, he died less than three months later, attended, undoubtedly intent on being the fifth vote to uphold the tax, one of the other justices switched sides, however, and the income tax ruled unconstitutional, five to four (Gordon 04: 275).

 

In 1876 the Greenback Labor Party nominated a candidate for president, Peter Cooper of New York, paradoxically one of the richest men in the country, a “limousine liberal”, and in 1878 the party attracted 1,060,000 votes in congressional elections, enough to elect fourteen congressmen.  The government had stopped printing greenbacks after the Civil War, started minting silver dollars and then stopped in 1873 and Congress voted to return to the gold standard on January 1, 1879 and the Treasury was required to maintain a gold reserve of $100 million to meet any demand for the precious metal.  But when the crash of 1893 marked the onset of a new depression, the trickle of gold out of the Treasury rose to a flood.  As government revenues plunged, they declined from $386 million to $306 million between 1893 and 1894, the government issued bonds to buy more gold to replenish the gold reserve, but the metal continued to flow out.  Before long the Treasury gold reserve dipped below the $100 million required by law in 1894 and was replenished by the proceeds of a $50 million bond issue in January of that year.  But it fell to just $68 million the following January.  A week later it was down to $45 million.  J.P. Morgan, by then the country’s undisputed leading banker, and the American representative of the Rothschild’s, promised President Grover Cleveland that they would raise $100 million in gold from Europe.  In June 1895 the Treasury’s gold reserve stood at $107.5 million.  Economic recovery had begun (Gordon 04: 268).

 

In the early years of the twentieth century the United States enjoyed prosperity beyond anything previously experienced.  In the ten years between 1897 and 1907, American exports doubled, as did its imports.  The amount of money in circulation, national banknotes and gold and silver coins, increased from $1.5 billion to $2.7 billion, while bank deposits soared from $1.6 billion to $4.3 billion, a figure larger than the GDP in 1860.  The assets of banks, brokerage houses and insurance companies increased from $9.1 billion in 1897 to $21 billion ten years later.  The United States had one-third of the world’s railroad mileage and 40 percent of its steel production.  Ninety percent of the population was literate and supported more than twenty-two hundred newspapers.  The country had a thousand colleges and universities and more high school students than any other on earth (Gordon 04: 281).  The U.S. was the world’s greatest exporter of agricultural products.  Its per capita income was far ahead of the next richest nation, Great Britain, which had dominated the world economy in the nineteenth century.  The rest of the developed world was also enjoying great prosperity.  The greatest engineering project in history the Panama Canal linked two oceans.  But there was a problem.  On the gold standard the economy could only grow as fast the gold supply that backed the world’s currencies.  Gold production had stagnated in the 1880s, despite strikes in the Yukon and South Africa, by 1907 money markets were very tight (Gordon 04: 279).

 

On Monday, October 21, 1907, some five months after the start of an economic recession, the Knickerbocker Trust Company, the third largest trust company in New York City, began to experience financial difficulties.  The next day a “run” on the bank forced it to close (temporarily, as it turned out; it resumed business in March 1908).  The closing of the Knickerbocker Trust precipitated runs on other trust companies in New York and then in other parts of the country a banking “panic” was under way of a kind that had occurred every now and then during the nineteenth century. In some state the government took measures that gave legal sanctions to the restriction of payments, in the remaining state the practice was simply tolerated and banks were permitted to stay open even though they were technically violating the state banking laws (Friedman 80: 72).  This dramatic episode was largely responsible for the Federal Reserve Act of 1913.  One bank alone can meet a run by borrowing from other banks, or by asking its borrowers to repay their loans.  The borrowers may be able to repay their loans by withdrawing cash from other banks.  But if a bank run spreads widely, all banks together cannot meet the run in this way.  There simply was not enough currency in bank vaults to meet a widespread run (Friedman 80: 72-73).

 

When Theodore Roosevelt became president in 1901 on the assassination of William McKinley, he had moved sharply in the direction of the progressive wing of his party.  In 1906 he even advocated a tax on inheritances.  Taft, a far more conservative man than Roosevelt, revered the Supreme Court.  Indeed he would serve as chief justice, an office far more congenial to his nature than the presidency, for most of the 1920s.  He was horrified at the idea of defying the Supreme Court so he proposed the idea of a constitutional amendment that would permit an income tax and proposed a corporate income tax on profits.  In 1911 the Supreme Court agree unanimously.  The Sixteenth Amendment, meanwhile passed the Senate 77-0 and the House 318-14.  The amendment was ratified by the required number of state legislatures and was declared effective on February 3, 1913.   By that time the Republican Party had split between the conservative Taft Republicans and the progressive Roosevelt Republicans, who stormed out of the 1912 convention to form their own party under the symbol of the bull moose.  As a result, the Democrat Woodrow Wilson was elected president with less than 42 percent of the popular vote but with almost 82 percent of the electoral votes (Gordon 04: 271).  Among the first acts of the new Wilson administration was the passage of a personal income tax law.  Although only fourteen pages long, it contained the seeds of the vast complexity that was to come.  Income more than $3,000 was to be taxed, on a progressive scale from 1 to 7 percent (on incomes more than $500,000.  But there were many exemptions, such as interest on state and local bonds and corporate dividends up to $20,000.  Interest on all debts, depreciation of property, and many other things were deductible from taxable income.  The corporate income tax remained a completely separate tax.  The financial exigencies of the twentieth century’s great wars would send income tax rates soaring to heights undreamed of by even its most passionate advocates (Gordon 04: 277). Justice Oliver Holmes said, “Taxes are the price we pay for civilization.”

 

Fig. 5.3 Federal Income Tax First and Top Bracket Rates 1913-2008

                                                                                                                                                                                          

 

1st Bracket Rate

1st Bracket Income up to

Top Bracket Rate

Top Bracket Income over

Total Individual Income Tax Revenues

In millions

1913

1

20,000

7

500,000

 

1914

1

20,000

7

500,000

 

1915

1

20,000

7

500,000

 

1916

2

20,000

15

2,000,000

 

1917

2

2,000

67

2,000,000

 

1918

6

4,000

77

1,000,000

 

1919

4

4,000

73

1,000,000

 

1920

4

4,000

73

1,000,000

 

1921

4

4,000

73

1,000,000

 

1922

4

4,000

56

200,000

 

1923

3

4,000

56

200,000

 

1924

1.5

4,000

46

500,000

 

1925

1.5

4,000

25

100,000

 

1926

1.5

4,000

25

100,000

 

1927

1.5

4,000

25

100,000

 

1928

1.5

4,000

25

100,000

 

1929

3/8

4,000

24

100,000

 

1930

1 1/8

4,000

35

100,000

 

1931

1 1/8

4,000

35

100,000

 

1932

4

4,000

63

1,000,000

 

1933

4

4,000

63

1,000,000

 

1934

4

4,000

63

1,000,000

420

1935

4

4,000

63

1,000,000

527

1936

4

4,000

79

5,000,000

674

1937

4

4,000

79

5,000,000

1,092

1938

4

4,000

79

5,000,000

1,286

1939

4

4,000

79

5,000,000

1,029

1940

4.4

4,000

81.1

5,000,000

892

1941

10

2,000

81

5,000,000

1,314

1942

19

2,000

88

200,000

3,263

1943

19

2,000

88

200,000

6,505

1944

23

2,000

94

200,000

19,705

1945

23

2,000

94

200,000

18,372

1946

19

2,000

86.45

200,000

16,098

1947

19

2,000

86.45

200,000

17,935

1948

16.6

2,000

82.13

200,000

19,315

1949

16.6

2,000

82.13

200,000

15,552

1950

17.4

2,000

84.36

200,000

15,755

1951

20.4

2,000

91

200,000

21,616

1952

22.2

2,000

92

200,000

27,934

1953

22.2

2,000

92

200,000

29,816

1954-63

20

2,000

91

200,000

29,542

1955

20

2,000

91

200,000

28,748

1956

20

2,000

91

200,000

32,188

1957

20

2,000

91

200,000

35,620

1958

20

2,000

91

200,000

34,724

1959

20

2,000

91

200,000

36,719

1960

20

2,000

91

200,000

40,715

1961

20

2,000

91

200,000

41,338

1962

20

2,000

91

200,000

45,571

1963

20

2,000

91

200,000

47,588

1964

16

500

77

200,000

48,697

1965

14

500

70

100,000

48,792

1966

14

500

70

100,000

55,446

1967

14

500

70

100,000

61,526

1968

14

500

75.25

100,000

68,726

1969

14

500

77

100,000

87,249

1970

14

500

71.75

100,000

90,412

1971

14

1,000

70

200,000

86,230

1972

14

1,000

70

200,000

94,737

1973

14

1,000

70

200,000

103,246

1974

14

1,000

70

200,000

118,952

1975

14

1,000

70

200,000

122,386

1976

14

1,000

70

200,000

131,603

1977

14

1,000

70

200,000

157,626

1978

14

1,000

70

200,000

180,988

1979

14

2,100

70

212,000

217,841

1980

14

2,100

70

212,000

244,069

1981

13.825

2,100

69.125

212,000

285,917

1982

12

2,100

50

106,000

297,744

1983

11

2,100

50

106,000

288,938

1984

11

2,100

50

159,000

298,415

1985

11

2,180

50

165,480

334,531

1986

11

2,270

50

171,580

348,951

1987

11

3,000

38.5

90,000

392,557

1988

15

29,750

28

29,750

401,181

1989

15

30,950

28

30,950

445,690

1990

15

32,450

28

32,450

466,884

1991

15

34,000

31

82,150

467,827

1992

15

35,800

31

86,500

475,964

1993

15

36,900

39.6

250,000

509,680

1994

15

38,000

39.6

250,000

543,055

1995

15

39,000

39.6

256,500

590,244

1996

15

40,100

39.6

263,750

656,417

1997

15

41,200

39.6

271,050

737,466

1998

15

42,350

39.6

278,450

828,586

1999

15

43,050

39.6

283,150

879,480

2000

15

43,850

39.6

288,350

1,004,462

2001

15

45,200

39.1

297,350

994,339

2002

10

12,000

38.6

307,050

858,345

2003

10

14,000

35.0

311,950

793,699

2004

10

14,300

35.0

319,100

808,959

2005

10

14,600

35.0

326,450

927,222

2006

10

15,100

35.0

336,550

1,043,908

2007

10

15,650

35.0

349,700

1,163,472

2008

10

16,050

35.0

357,700

1,145,747

Sources: National Taxpayers Union History of Federal Individual Income Tax Bottom and Top Bracket Rates 1913-2008; Table VIII Series Y 440-456  Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 2. Pg. 1095. OMB Historical Table 2.1 Receipts by Source

 

In nineteenth century America elderly people faced four alternatives: live on savings, move in with children, subsist on the crumbs of private and public charity or keep on working (Katz 01: 232).  The federal government operated a massive pension program for Civil War veterans.  Congress granted the first Civil War pensions to veterans in 1862 and in 1890 it expanded pension eligibility to any veteran who had served at least ninety days, regardless of combat experience or injury, or to his dependents.  The qualifying condition, instead, was the inability to perform manual labor, usually defined by age.  A 1906 amendment labeled age sixty two the commencement of “permanent specific disability”.  As a result, at least one of every two elderly, native-born Northern white mend and many of their widows received pensions from the federal government.  Veteran’s pensions became the largest item in the federal budget after the national debt.  Pressure for a new form of old-age assistance surfaced after about 1910, as Civil War veterans and their dependents began to die (Katz 01: 233).  The earliest American proposals for health insurance focused on the link between sickness and poverty.  When the agents employed by Charity Organization Societies set out to investigate applicants for relief in the latter decades of the nineteenth century, they found illness implicated over and over again in destitution.  This link between poverty and sickness is the reason why early American health insurance proposals focused on assuring some income during periods of illness, what today we would call disability insurance. (Katz 01: 257).

 

Social insurance originated in Germany.  Bismarck introduced sickness insurance in 1883, workers’ compensation in 1884 and old age insurance in 1889.  Germany’s first unemployment insurance began in 1927.  As a conservative, Bismarck intended social insurance to bind workers to the state and preserve social order.  In England, social insurance started a little later: worker’s compensation in 1897, old age in 1908, and sickness and unemployment in 1911.  In the United States, some state governments pioneered social insurance in the years between 1911 and 1930s; Veteran’s Pensions was the only federal program.  But in contrast to Europe after World War II, where national social insurance programs developed into a relatively universal and unified system, America’s social insurance structure remained rickety, incomplete, and poorly coordinated; it was part national and part state, and it left whole categories of individuals without guaranteed protection, dependent on public or private charity (Katz 01: 196). In both American and Europe, worries about the impact of social insurance, as well as of relief, charity and welfare, on labor markets have always retarded the development of public programs to reduce risks and relieve poverty.  The question asked again and again has been, do they erode the will to work?  The disincentives thought to result from social insurance and relief are what economists label “moral hazard”” (Katz 01: 196).  After the Democrats took control of the House of Representatives in 1910, Congress finally passed a bill creating a Cabinet level department to “promote and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance their opportunities for profitable employment”.  William Howard Taft grudgingly signed the bill into law on March 4, 1913, the final day of his presidency (Cohen 09: 195).

 

Fig. 5.4 Foreign Born and Native Population in the United States 1950-1990

 

Year 1/

Total
population

Native population

Foreign-
born
population

Total

Born in the
United States

Born abroad

Total

In
outlying
areas

Of
American
parents

NUMBER

 

 

 

 

 

 

 

1990*

248,709,873

228,942,557

225,695,826

3,246,731

1,382,446

1,864,285

19,767,316

1980*

226,545,805

212,465,899

210,322,697

2,143,202

1,088,172

1,055,030

14,079,906

1970*

203,210,158

193,590,856

191,329,489

2,261,367

891,266

1,370,101

9,619,302

1960*

179,325,671

169,587,580

168,525,645

1,061,935

660,425

401,510

9,738,091

1950*

150,216,110

139,868,715

139,442,390

426,325

329,970

96,355

10,347,395

1940

131,669,275

120,074,379

119,795,254

279,125

156,956

122,169

11,594,896

1930

122,775,046

108,570,897

108,304,188

266,709

136,032

130,677

14,204,149

1920

105,710,620

91,789,928

91,659,045

130,883

38,020

92,863

13,920,692

1910

91,972,266

78,456,380

78,381,104

75,276

7,365

67,911

13,515,886

1900

75,994,575

65,653,299

65,583,225

70,074

2,923

67,151

10,341,276

1890

62,622,250

53,372,703

53,362,371

10,332

322

10,010

9,249,547

1880

50,155,783

43,475,840

43,475,498

342

51

291

6,679,943

1870

38,558,371

32,991,142

32,990,922

220

51

169

5,567,229

1860

31,443,321

27,304,624

27,304,624

-

-

-

4,138,697

1850

23,191,876

20,947,274

20,947,274

-

-

-

2,244,602

PERCENT
  DISTRIBUTION

 

 

 

 

 

 

 

1990*

100.0

92.1

90.7

1.3

0.6

0.7

7.9

1980*

100.0

93.8

92.8

0.9

0.5

0.5

6.2

1970*

100.0

95.3

94.2

1.1

0.4

0.7

4.7

1960*

100.0

94.6

94.0

0.6

0.4

0.2

5.4

1950*

100.0

93.1

92.8

0.3

0.2

0.1

6.9

1940

100.0

91.2

91.0

0.2

0.1

0.1

8.8

1930

100.0

88.4

88.2

0.2

0.1

0.1

11.6

1920

100.0

86.8

86.7

0.1

-

0.1

13.2

1910

100.0

85.3

85.2

0.1

-

0.1

14.7

1900

100.0

86.4

86.3

0.1

-

0.1

13.6

1890

100.0

85.2

85.2

-

-

-

14.8

1880

100.0

86.7

86.7

-

-

-

13.3

1870

100.0

85.6

85.6

-

-

-

14.4

1860

100.0

86.8

86.8

-

-

-

13.2

1850

100.0

90.3

90.3

-

-

-

9.7

Source: Historical Census Statistics on the Foreign-born Population of the United States: 1850-1990

 

During the latter half of the nineteenth century the United States was a beacon of hope for people, mostly from Eastern Europe.  Millions of people eager for opportunity and fleeing persecution in the Old World flocked to American shores.  The 1850 decennial census was the first census in which data were collected on the nativity of the population. From 1850 to 1930, the foreign-born population of the United States increased from 2.2 million to 14.2 million, reflecting large-scale immigration from Europe during most of this period.  As a percentage of total population, the foreign-born population rose from 9.7 percent in 1850 and fluctuated in the 13 percent to 15 percent range from 1860 to 1920 before dropping to 11.6 percent in 1930. The highest percentages foreign born were 14.4 percent in 1870, 14.8 percent in 1890 and 14.7 percent in 1910.  From 1930 to 1950, the foreign-born population of the United States declined from 14.2 million to 10.3 million, or from 11.6 percent to 6.9 percent of the total population. These declines reflected the extremely low level of immigration during the 1930s and 1940s. The foreign-born population then dropped slowly to 9.6 million in 1970, when it represented a record low 4.7 percent of the total population. Immigration had risen during the 1950s and 1960s, but was still low by historical standards, and mortality was high during this period among the foreign-born population because of its old age structure (reflecting four decades of low immigration).  Since 1970, the foreign-born population of the United States has increased rapidly due to large-scale immigration, primarily from Latin America and Asia. The foreign-born population rose from 9.6 million in 1970 to 14.1 million in 1980 and to 19.8 million in 1990. The estimated foreign-born population in 1997 was 25.8 million. As a percentage of the total population, the foreign-born population increased from 4.7 percent in 1970 to 6.2 percent in 1980, to 7.9 percent in 1990, and to an estimated 9.7 percent in 1997 (Gibson, Lennon 99).

 

VI.             Federal Reserve

 

Backed by J.P. Morgan it took six years of intricate negotiations to get a political agreement on the creation of the Federal Reserve System.  All national banks were required to be members of the new central banking system, and state banks that could meet the capital requirements of national banks, were eligible for membership as well.  The advantage of membership, of course, was that in a panic, member banks could use their loan portfolios as collateral to obtain cash in a hurry from the Federal Reserve.  The downside of membership was a new layer of regulation added to, rather than replacing, the older regulatory bodies, such as the Comptroller of the Currency.  The new Federal Reserve System came into existence in 1913, and the United States had a central bank, for the first time since Andrew Jackson had been president.  J.P. Morgan, the country’s de factor central banker in much of the post-Civil War era, had been born in 1836, the same year as the charter of the Second Bank of the United States expired and he died the same year the Federal Reserve, its long needed replacement, was born in 1913 (Gordon 04: 281).  The Federal Reserve System started to operate in late 1914, a few months after the outbreak of war in Europe.  By the end of the war the United States had replaced Britain as the center of the financial world.  The Federal Reserve Banks bought bonds from the U.S. Treasury and paid for them with Federal Reserve Notes that the Treasury could pay out to meet some of its expenses.  But mostly the Fed paid for bonds it bought by crediting the Treasury with deposits at the Federal Reserve Banks.  When the recipients deposited the checks in their own banks and these banks in turn deposited them at a Federal Reserve Bank, the Treasury deposits at the Fed were transferred to the commercial banks, increasing their reserves.  The subtlety of the process whereby the quantity of money was increased did not prevent inflation, but it did smooth the operation and, by concealing what was actually happening, lessen or postpone the public’s fears about inflation (Friedman 80:78). 

 

Automobiles and electricity became commonplace.  German Nickolaus Otto had built the first practical internal combustion engine in 1876 and Wilhelm Maybach, also German, invented the carburetor in 1893.  In 1903 alone, fifty-seven automobile companies came into existence in the United States and twenty-seven-seven went bankrupt.  Today there are no more than two dozen automobile companies, all of them necessarily multibillion-dollar corporations, in the world.  In 1903 Henry Ford opened the Ford Motor Company, that introduced the Model T in 1908.  At $850 a piece the public bought 10,607 that year, the price later dropped to $265 in by the 1920s some 1.9 million cares rolled off assembly lines and 8.1 million vehicles were in registration.  By the 1920s the automobile industry had become the largest in the American economy.  The seemingly insatiable national appetite for cars produced a decade of great industrial prosperity.  GNP increased by 59 percent between 1921 and 1923 reaching $103.1 billion.  Meanwhile, GNP per capita rose by 42 percent and personal income by more than 38 percent.   By 1929 production was up to 4.5 million cars, and 23.1 million had been registered (Gordon 04: 298).  The automobile also greatly increased road building, from hardly any paved roads in 1900, by 1920 there were 369,000 miles and by 1929 there were 662,000 miles (Gordon 04: 299).  

 

Although Benjamin Franklin experimented with lightning electricity in the18th century and in 1831 Michael Faraday proved the identity of electricity and magnetism and produced the first practical use of electricity – the telegraph – it was not until the end of the century that electricity began to impact on everyday life. In his Menlo Park laboratory Thomas Edison invented the phonograph (1877), the electric light (1879) and hundreds of other inventions.  When General Electric was formed in 1892 by J.P. Morgan from the Edison General Electric Company and its major competitors there was need for power plants.  Edison built the world’s first power plant and installed six of the largest dynamos yet built, weighing thirty tons each.  Edison applied for no less than 102 patents in 1882, his most prolific year.  Electricity spread through the business districts and fashionable residential areas, but remained expensive, it cost about 1 cent an hour to light a single bulb, and meters monitoring usage were invented.  In 1902 the United States used 6 billion kilowatt-hours of electricity about 79 kilowatt-hours per person.  In 1929 it was 118 billion, and 960 kilowatt-hours per person.  Today the usage is a staggering 3.9 trillion kilowatt hours, more than 13,500 per person, more than 170 times as much electricity as was used per person in 1902 (Gordon 04: 306-307).

 

The twentieth century didn’t really begin until August 1, 1914.  As the threat of war became ever greater in the last day of July 1914, stock markets the world over panicked while the demand for gold soared.  On Tuesday, July 28, unable to maintain orderly markets, the exchanges in Vienna, Rome and Berlin closed.  The net day volume on the New York Stock Exchange reached 1.3 million shares, its highest since the panic of 1907 and many stocks fell more than 20 percent.  On Friday July 31, the London Stock Exchange closed and the New York Stock Exchange was the only one scheduled to open but J.P Morgan and the Secretary of Treasury William Gibbs McAdoo decided to close the exchange until further notice.  It would not be until December before the exchange reopened and then on a limited basis.  At first American commerce was severely disrupted.  Cotton exports declined sharply and so did wheat.  Germany had imported 2.6 million bushels of wheat in July, but none in August, as the Royal Navy asserted its sea power (Gordon 04: 287).  Soon however the situation reversed and American exports of agricultural products increased quickly.  Between December 1913 and 1914 the U.S. exported a total of eighteen million bushels of wheat, a year later wheat exports amounted to ninety-eight million bushels.  As the war dragged on more and more agricultural workers were called into service but agricultural exports continued to increase, net farm income in the war years more than doubled, to $10 billion and the value of agricultural lands, buildings and equipment rose nearly 30 percent (Gordon 04: 288). 

 

American manufacturing also increased rapidly as the result of the World War in Europe.  Markets in Latin American and Asia, which had been served by European companies, were now open to be taken over by American firms.  Far more important was the avalanche of order that began to roll in to American firms form Great Britain and its allies, for steel, vehicles, railroad rolling stock and rails, and a new invention barbed wire. Munitions were of course n the greatest demand.  Du Pont had been only a midsized manufacturer of gunpowder before the war, but would come to supply the Allies with fully 40 percent of their munitions.  In the four years of war Du Pont’s military business increased by a factor of 276 and it became one of the world’s largest chemical companies as well.  By the end of the war Du Pont had revenues twenty-six times as large as they had been in 1913 (Gordon 04: 292).  Overall the gross national product of the United States increased by 21 percent in the four years of the war, while manufacturing increased by 25 percent (Gordon 04: 289). 

 

The war’s effect on federal finances was both great and permanent, just as the civil War’s had been.  Since 1865 the government had never spent more in one year than the $746 million it had spent in 1915.  The national debt that year was a mere $1.191 billion, John D. Rockefeller could have paid it off himself and still been the richest man in the country.  After the First World War, however, annual government outlays were never less than $2.9 billion and the national debt rose to more than $25 billion in 1919. The personal exemption from the income tax dropped to $1,000 from $3,000 and the tax rate on incomes more than $500,000 rose from 7 percent to 77 percent.  The income tax thus became the primary source of federal revenues and has remained so ever since (Gordon 04: 292).  Even as late as 1914 the United States remained the world’s largest debtor nation, with investments abroad that equaled $3.5 billion and European investment in the United States worth $7.2 billion.  By the end of the war, the situation had nearly reversed, with foreigners holding $3.3 billion in American securities and Americans owning foreign investments of $7 billion.  In addition foreign governments, principally France and Britain, owed the United States government $9.6 billion in war loans.  Thus in four years, the United States had gone from being a net debtor, owing $3.7 billion, to being a net creditor that was owed a total of $12.6 billion.  While the United States had military deaths amounting to 126,000 in the First World War, France, with a population of less than 40 million had lost 1,357,000 young men, the British Empire 908,000, Germany 1,773,000, Austria 1,200,000 and Russia 1,700,000 (Gordon 04: 293).

 

Fig. 6.1 Federal Government Revenues by Source, Note Income Tax and Alcohol Excise, 1902-1934 (in millions of dollars)

 

 

1902

1913

1922

1927

1932

1934

Total

653

962

4,261

4,469

2,634

3,886

 Income Tax

n/a

 

1,931

879

405

405

Corporate Tax

n/a

35

1,259

598

386

Customs Duties

243

310

318

585

311

299

Alcohol Excise

187

223

44

20

8

248

Tobacco Excise

49

77

270

375

398

424

Other Excise Tax

8

2

520

107

16

708

Death and Gift

5

n/a

139

90

41

110

Other Taxes

21

21

142

47

36

164

Source: Y 567- 589 Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 2. Pg. 1122

 

The Consumer Price Index nearly doubled between 1915 and 1920.  A third of total wartime inflation occurred after the end not only of the war but also of government deficits to pay for the war (Friedman 80: 77).  The Federal Reserve had kept interest rates low during the war to facilitate the government’s borrowing needs, and maintained those rates until November 1919 after the passage of the XIX Amendment prohibited alcohol.  Then the Fed moved the rediscount rate in a series of abrupt steps from 4 percent to 7 percent over the next eight months.  The economy had been moving towards another recession with the end of vast military orders and the revival of European agriculture.  The Federal Reserve’s actions turned a decline into a near disaster.  The money supply contracted by 9 percent, while unemployment shot up from 4 to 12 percent.  GNP declined by nearly 10 percent.  But at least the Federal Reserve’s overcorrection broke the back of the wartime inflation and wholesale prices declined by nearly 40 percent between 1920 and 1921.  Fortunately the depression of 1920-21 proved to be short lived (Gordon 04: 295).   “The reign of tears is over.  The slums will be only a memory.  We will turn our prisons into factories and our jails into storehouses and corncribs.  Men will walk upright now, women will smile, and the children will laugh.  Hell will be forever for rent.”  That is how Billy Sunday, noted evangelist and leading crusader against Demon Rum, greeted the onset of Prohibition in 1920, enacted in a burst of moral righteousness at the end of the First World War.  New prisons and jails had to be built to house the criminals spawned by converting the drinking of spirits into a crime against the state.  Al Capone, budget Moran became notorious for their exploits, murder, extortion, hijacking, bootlegging.  But in order for the people to have a drink, they had to break the law.  Prohibition didn’t stop drinking.  It did convert a lot of otherwise law-obedient citizens into lawbreakers (Friedman 80: 226). 

 

After the war the Federal Reserve System continued to increase the quantity of money rapidly, thereby feeding the inflation.  At this stage, however, the additional money was being used not to pay for the government’s expenses but to finance private business activities.  Ironically the banks that most needed discipline and protection against runs were the very banks that did not join the system, the small, stand-alone banks.  By 1920 these fragile vessels holding the liquid assets of millions of American families and businesses would number almost thirty thousand (Gordon 04: 281).  There were an astonishing number of local banks peaking at 29,798 in 1921, almost all of them one-branch outfits with assets under a million dollars, and which were not members of the Federal Reserve.  The number of bank failures in the United States in the 1920s despite the general prosperity, began to increase.  By the end of the decade, more than six hundred rural banks a year were failing, often taking the savings of their customers with them (Gordon 04: 301).  Much of the success during the twenties can be credited to Benjamin Strong, a New York banker who was the first head of the Federal Reserve Bank of New York and remained its head until his untimely death in 1928.  Until he died, the New York Bank was the prime mover in Federal Reserve policy both at home and abroad.  Strong’s death unleashed a struggle for power within the System that was fated to have far-reaching consequences.  As Strong’s biographer puts it, “Strong’s death left the System with no center of enterprising and acceptable leadership” (Friedman 80: 78).

 

By the end of the First World War the United States had become financially as well as economically the strongest country in the world.  It was the world’s greatest creditor nation, and its share of the world’s manufacturing increased from 36 percent in 1914 to 42 percent by the end of the 1920s.  But Woodrow Wilson was outmaneuvered at the Versailles Peace Conference and a draconian, merciless peace was imposed on Germany, requiring it to pay vast war reparations to the victors, but not the United States which demanded no reparations.  Britain, France and Italy were saddled with huge war debts to the United States, which they had scant means to pay and the United States had scant interest in forgiving.  Further, the United States was determined to maintain a high tariff to protect American producers and to have a favorable balance of trade.  Meanwhile the Federal Reserve returned to a policy of low interest rates while European central banks maintained high ones to protect the value of their currencies.  The result was that American investment banks pushed highly profitable loans and underwritings in Europe.  Europe used the proceeds to finance imports from the United States, and Germany used them to fund reparations to the Allied Powers.  The Allied Powers then used the reparations to repay their war loans to the United States (Gordon 04: 311). The First World War cost Europe the deaths of 8.5 million soldiers and 5 million civilians.  The elite of European society – including half of the men in France between the ages of twenty and thirty-two – went to their graves.  In geopolitical terms the only “winner” to emerge from this bloodbath was the United States who suffered some 115,000 military deaths, about a fifth of the toll of the Civil War.  Otto von Bismarck’s unification of Germany spurred fantasies of a German century but what occurred was an American century (Gordon 04: 313).

 

Between 1910 and 1920 only about 21 large firms a year started pension plans, in the 1920s the number rose to about 45.  By 1925 over 200 firms, led by the railroads, which dominated the expansion of private pensions, offered them.  In 1929 fewer than 4 percent of men employed in industry and fewer than 3 percent of women had worked long enough at a single firm to qualify.  The benefits themselves remained insecure, subject to reduction or elimination and unprotected from inflation.  Chicago introduced the first teachers’ pensions in 1895, no other cities followed for fifteen years, then between 1911 and 1915 the number multiplied rapidly.  By the late 1920s retirement funds for policemen, teachers and firemen had become nearly universal.  Nonetheless, as of 1932, only about 15 percent of American workers were eligible for them.  In 1921 the national government gave employers tax exemptions for contributions to trust funds designed to accumulate and distribute capital for fringe benefits.  Treasury rulings in 1914 and 1921 allowed businesses to deduct pension expenses from the recently enacted income tax.  The 1926 Revenue Act wrote these administrative rulings into law.  The federal government had begun to subsidize social welfare before the New Deal (Katz 01: 172).  To aggravate the restraints on trade imposed by Prohibition the codification of Title 22 of the United States Code Foreign Relations (a-FraI-d) without regards for the obscenity, in regards to the invention of can-sir from XIX Amendment tobacco, or abuse of power and appointment of J. Edgar Hoover, Director the Bureau of Investigations, later FBI, both in 1924, were subversive to the economic policy of the Federal Reserve (FR-ee), secretly catalyzed the Great Depression and in some shape or form all subsequent economic crisis.  

 

VII.          Hooverville

 

In 1928 American investment bankers began increasingly to turn to a market even more lucrative than European loans, the call money market on Wall Street.  Call money was the term for the funds used to finance stocks held on margin.  Speculators could buy stocks on as little as 10 percent margin, borrowing the rest from the broker.  As long as the stock, which served as collateral for the loan, was headed upward, all was fine, and the speculator could increase his capital very quickly, but if the stock price declined, he had to put up more money or he would be sold, often wiping him out.  The call money market was very lucrative in the late 1920s and while the GNP increased by 59 percent the Dow Jones went up by 400 percent.  In 1928 the Federal Reserve acted to slow down the economy and the boom on Wall Street, which was showing signs of getting out of hand.  Benjamin Strong head of the New York Federal Reserve raised its discount rate to 5 percent from 3.5 percent and then in the fall of 1928 died of complications from tuberculosis.  On September 3, the day after Labor Day the New York Stock Exchange closed at an all time high.  Over the next six weeks the market trended downward.  Then on October 23, selling swept the market and on Thursday, October 24 soon known as Black Thursday, was the most frantic day in the history of the exchange and stocks plunged.  Then on Black Tuesday, October 29 the market plunged from the opening bell and kept plunging and at the end of the day stood at 23 percent below where it had closed on Saturday and nearly 40 percent below its high of early September (Gordon 04: 315-316).

Fig. 7.1 Depression's impact on the economy 1929 and 1933

 

1929

1933

Banks in operation

25,568

14,771 

Prime interest rate

5.03%

0.63%

Volume of stocks sold (NYSE)

1.1 B

0.65 B

Privately earned income

$45.5B

$23.9B

Personal and corporate savings

$15.3B

$2.3B

Source: Historical Statistics of the United States, pp. 235, 263, 1001, and 1007

 

The depression that started in mid-1929 was a catastrophe of unprecedented dimensions for the United States.  The dollar income of the nation was cut in half before the economy hit bottom in 1933.  Total output fell by a third, and unemployment reached the unprecedented level of 25 percent of the work force.  The depression was no less a catastrophe for the rest of the world.  As it spread to other countries, it brought lower output, higher unemployment, hunger, and misery everywhere (Friedman 80: 70).  The popular view is that the depression started on Black Thursday, October 24, 1929, when the New York stock market collapsed.  After several intermediate ups and downs, the market ended up in 1933 at about one-sixth the dizzying level of 1929.  The stock market crash was important, but it was not the beginning of the depression. Business activity reached its peak in August 1929, two months before the stock market crashed.  The crash reflected the growing economic difficulties plus the puncturing of an unsustainable speculative bubble.  With Strong dead, from tuberculosis, the Board wanted to establish its leadership.  It moved rapidly to impose its discipline on New York, and New York yielded.  Thereafter the System acted very differently than it had during earlier economic recessions in the 1920s. Instead of actively expanding the money supply by more than the usual amount to offset the contraction, the System allowed the quantity of money to decline slowly throughout 1930 (Friedman 80: 79).  Compared with the decline of roughly one-third in the quantity of money from late 1930 to early 1933, the decline in the quantity of money up to October 1930 seems mild, a mere 2.6 percent (Friedman 80: 79). 

 

The character of the recession changed dramatically when a series of bank failures in the Middle West and South undermined confidence in banks and led to widespread attempts to convert deposits into currency.  The contagion finally spread to New York, the financial center of the country (Friedman 80: 80).  The critical date is December 11, 1930 when the Bank of United States closed its doors.  It ended up paying off depositors 83.5 cents on the dollar (Friedman 80: 81). Two of the owners were tried, convicted and served prison sentences.  Banks failed in droves, 352 banks in the month of December 1930 alone.  Had the Federal Reserve never been established, and had a similar series of runs started, there is little doubt that the same measures would have been taken as in 1907, a restriction of payments.  Restriction would have almost certainly prevented the subsequent series of bank failures in 1931, 1932 and 1933, just as restrictions in 1907 quickly ended bank failures.  (Friedman 80: 82).  At the peak of the peak of business in mid 1929, nearly 25,000 commercial banks were in operation in the United States.  By early 1933 the number had shrunk to 18,000.  When the banking holiday was ended by President Roosevelt ten days after it began, fewer than 12,000 banks were permitted to open, and only 3,000 additional banks were later permitted to do so.  All in al, therefore, roughly 10,000 out of 25,000 banks disappeared during those four years, through failure, merger or liquidation.  The total stock of money showed an equally drastic decline.  For every $3 of deposits and currency in the hands of the public in 1929, less than $2 remained in 1933, a monetary collapse without precedent (Friedman 80: 84).

 

Although the stock market had been a national obsession in 1929, its crash had not directly affected that many families.  To be sure 659 banks failed in 1929, but that was slightly below the annual average for the decade and no major banks had collapsed as a result of the crash (Gordon 04: 318).  President Herbert Hoover called a conference of businessmen in November 1929 and urged them to invest in construction, he telegraphed state governors, who funded 80 percent of government construction, to do the same and in the spring he promised to increase spending by $140 million.  No small sum in a federal budget that amounted to only $3.3 billion or about 3 percent of GNP.  At the time twenty-five percent of the federal budget went to debt service, and most of the rest to fund the 139,000 man army and the 95,000 man navy.  The winter and early spring of 1930 say the stock market rebound regaining about 45 percent of what had been lost.  By the Spring of 1930 it didn’t look as if more would be needed and President Hoover told a religious group, “You have come sixty days too late.  The depression is over.” (Gordon 04: 320).  The public put much of the blame for the Crash of 1929 on the banks, both for their own stock speculation and because they pushed unsophisticated depositors into buying overpriced stocks (Cohen 09: 276).  The Nation explained, “If you steal $25, you’re a thief.  If you steal $250,000 you’re an embezzler.  If you steal $2,500,000 you’re a financier.”

 

Unfortunately Hoover then signed the Smoot-Hawley Tariff Act.  This was economic folly.  Tariffs are taxes and taxes inescapably are always a drag on the economy.  But far worse, high tariffs breed retaliation from other countries.  Professional economists knew this and a thousand of them signed a petition asking Hoover to veto the tariff bill.  The economist’s arguments proved all too true and world trade began to collapse.   Great Britain, the great champion of free trade since the 1840s, and the world’s largest trading nation, establish the “imperial preference system” to keep British trade within the British Empire.  Other nations adopted similar restrictions.  In 1929 total global trade had amounted to $36 billion.  In 1932 it was about $12 billion.  American exports had been $5.241 billion in 1929.  Three years later they were a mere $1.161 billion, a 78 percent drop and below the export level of 1896 if inflation is factored in.  As soon as the Smoot-Hawley tariff had been signed into law, the stock market began to give up its gains of the spring.   By the fall, the banks were beginning to fail in growing numbers.  The rate of failure had been up in 1930 over 1929, but not alarmingly so.  But then in the last two months of the year 600 banks failed, making a yearly total of 1,352, more than twice the number of 1929.  Most were the small unitary rural and poor urban neighborhood banks.  The Bank of United States was another matter, it had deposits of $268 million, held by 450,000 depositors, closed its doors on December 11, 1930 (Gordon 04: 321).

 

Protective tariffs limit industry.  As a proportion of the gross domestic product, exports were 6.2 percent in 1869-1873 and 5.8 percent in 1907-1911, the highest percentage reached in these years was 8.2 percent in the agricultural boom years of 1877-1881 (Schlesinger 99: 134). The transformation of America during the First World War from a debtor to a creditor nation made protection more than ever the mortal enemy of foreign markets.  Yet the business community and the Republican Party, oblivious to the behavior demanded of them by the Open Door school, responded by establishing the highest tariff rates up to that point in American history in 1922 and still higher rates in 1930.  By 1932 exports fell to 2.8 percent of the gross national product (Schlesinger 99: 135).  In the half century after 1920, omitting the years of the Second World War, exports exceeded 6 percent of the gross national product in only two years (1921 and 1947) and went overwhelmingly, not to the underdeveloped world, but to other developed countries.  As late as 1970, exports and imports together amounted to only 8.5 percent of the gross national product.  Not until the 1980s did foreign trade assume real importance for the modern American economy, accounting for nearly 20 percent of the gross national product.  The merchandise trade deficit, the gap between imports and exports, was the highest in American history (Schlesinger 99: 136).  

 

At the end of 1930, the country, while certainly experiencing hard times, was only in an ordinary depression, not even one as severe as that experienced in 1920-1921.  Then unemployment had averaged 11.9 percent.  In 1930 unemployment did not reach 9 percent.  It was in 1931 that the depression would become the Great Depression.  In the early of months of 1920 it looked as if the bottom had been reached and prosperity was around the corner.  Then events in Europe intervened.  On May 11, 1931 credit Ansalt, Austria’s largest bank and one of the most influential in Europe, failed.  This was a far greater collapse than the Bank of United States and a number of banks in Austria and Germany quickly followed it into oblivion.  Germany’s economy, already under huge pressure from reparations, began to implode.  Herbert Hoover proposed a one-year suspension of both loan repayments to the United States by the Allied Powers and German reparations to the Allied Powers, payments never resumed.  On July 13, 1931 Danat Bank, Germany’s largest, suspended operations, the Berlin stock market and city banks were closed.  The European financial system was in danger of collapse and the crisis soon spread to London.  On September 21 Britain went off the gold standard, which Britain itself had first established in 1821.  Britain’s days as a financial Great Power were over.  The United States moved to bolster its gold standard.  Bank depositors rushed to withdraw their money, and in the month after Britain abandoned the gold standard, 522 American banks failed (Gordon 04: 323-324).

 

By the end of 1931 the United States faced economic circumstances such as it had never faced before.  Bank failures had totaled 2,293 that year, each a tragedy for hundreds or thousands of families who saw their savings vanish. Unemployment spread relentlessly through the American economy rising to 15.9 percent by the end of the 1931.  GNP fell by a further 20 percent, automobile production which had been 4.5 million in 1929 fell to 1.9 million in 1931, causing massive lay offs.  With tax receipts plummeting by $900 million and expenses rising $200 million the federal budget went into deficit by half a billion dollars in fiscal 1931, equal to 13 percent of revenues, the largest peacetime deficit since the depression of the 1893.  At the time it was the conventional wisdom that balancing the budget was the first priority of the federal government after the defense of the Republic.  The idea that government should spend in deficits in time of economic crisis had yet been coined.  In late 1931 Hoover asked Congress for a huge tax increase to balance the budget, which they granted.  Hoover also signed a bill on February 2, 1932 that capitalized at $500 million and authorized the issuance of up to $2 billion in bonds, the Reconstruction Finance Corporation to provide emergency loans to banks, life insurance companies, farm mortgage associations, and railroads that otherwise might have collapsed.  Within six months the RFC had loaned out $1.2 billion, equal to a quarter of all federal expenditures that year (Gordon 04: 326).

 

The Federal government that Hoover presided over was small and limited in scope to conventional wisdom.  Herbert Hoover said on 25 March 1932, “the absolute necessity of a balanced budget is the most essential factor to economic recovery (5 May) the imperative and immediate step (13 May) indispensable (21 May) the first necessity of the Nation (11 August) the foundation of all public and private financial stability (11 August) (Cohen 09).  The government collected little revenue and therefore it had little money to dispense.  The federal income tax had been in effect a mere twenty years, and only about 5 percent of Americans paid it.  The total federal budget was just $3.3 billion.  Between 1930 and 1932 773 national banks and 3,604 state banks, with more than $2.7 billion in assets, had failed.  As rumors of impending bank failures spread, depositors rushed to withdraw their money.  The Bank failure started in Nashville, in the fall of 1930 and spread through the South and the Midwest.   Hoover yielded to Congressional pressure in 1932 establishing the Reconstruction Finance Corporation.  The RFC, which began with $3.5 billion in government funds and borrowing capacity, was authorized to lend money to troubled banks, mortgage companies and other financial institutions that were able to provide adequate security.  The government deficit in 1932, despite Hoover’s tax increase, was $2.7 billion.  Revenues had been a mere $1.9 billion.  It was the worst peacetime deficit in the nation’s history.  GNP was $58 billion, a mere 56 percent of what it had been three years earlier.  Unemployment stood at an entirely unprecedented 23.6 percent.  The number of hours of labor worked in 1932 was fully 40 percent below the level of 1929.  Another 1,453 banks had failed, bringing the depression total to a staggering 5,096.  In 1929 Americans had held about $11 in bank deposits for every dollar in currency and coin in circulation.  By 1932 the ratio was five to one, because so many banks had failed and so many more were distrusted.  The Dow Jones Industrial Average was down 90 percent from its high three years before (Gordon 04: 328).

The Federal Reserve didn’t understand and in its Annual Report for 1933 lauded itself, “The ability of the Federal Reserve Banks to meet enormous demands for currency during the crisis demonstrated the effectiveness of the country’s currency system under the Federal Reserve Act.”.  In 1929, 1930 and 1931 the New York Federal reserve Bank repeatedly urged the System to engage in large-scale open market purchases, the key notion the System should have taken but did not (Friedman 80: 85).  On symbol of the change was the transfer of the Federal Reserve Board from modest offices in the U.S. Treasury Building to a magnificent Greek temple of its own on Constitution Avenue, since supplemented with a massive additional structure (Friedman 80: 89).  By 1932 the shock wave of the Crash of 1929 had brought devastation to every corner of the country.  One-fourth of the nation’s workforce was unemployed and Fortune magazine estimated that 27 million Americans were without a regular income.  People with jobs struggled to survive on wages that had plunged to near starvation levels.  Up to 90 percent of children in some schools were underweight and many were drowsy from malnutrition.  The nation was crying out for the government to respond, but President Herbert Hoover refused to acknowledge the seriousness of the crisis.  His free-market ideology taught him that private enterprise should be the source of all solutions, and his near-religious commitment to “rugged individualism” convinced him that giving aid to the Depression’s victims would morally damage them.  Hoover’s callousness earned him the enmity of the unemployed and the bleak encampments erected in parks and under bridges were dubbed “Hoovervilles” (Cohen 09).  The hard times had thrown hundreds of thousands of Americans off the land.  Many rode the rails or trekked from town to town in search of work.  In 1932 Southern Pacific, a single railroad ejected 682,457 people from its trains.  FERA issued grants, through a program called the Transient and Homeless Relief, to provide direct aid to transients and to build camps around the country where they could spend the night.