American economic history

Since the beginning of the American financial crisis in 2008,
there has been a general consensus in most circles of American society
that something is now seriously wrong with the American economy.

But in a fantastic example of offering the wrong cure to the wrong problem,
the consensus response of most of the elite quacks
(what else does their analysis make them?)
is a combination of innovation, education, and immigration.
(Those will no more solve America’s economic problems
than using leeches to bleed patients
solved the health problems of eighteenth-century patients.)
They skip right over a careful analysis of
the past history of the American economy
and an analysis of the causes of the current maladies.

In this web page I will not offer too much
in the way of diagnoses and proposed solutions,
but rather will simply try to fill in a little of the American economic history
that the current (heavily Jewish and heavily feminized,
and I do think both are highly relevant here)
crop of “pundits” skip over.

To provide a little background,
here are some excerpts from Paul Kennedy’s 1987 book
The Rise and Fall of the Great Powers.
Although the theme of this post is economic history,
Kennedy also treats geopolitics,
and I have included some of his discussion where I thought it of interest.
The emphasis has been added.
We start with a table which merges several relevant tables from the book.

The table below merges three tables from Paul Kennedy’s
The Rise and Fall of the Great Powers:

Table 17 (Paul Bairoch)
Total Industrial Potential of the Powers in Relative Perspective.

Table 18 (Paul Bairoch)
Relative Share of World Manufacturing Output.

Table 30 (Hillman)
Relative Share of World Manufacturing Output
like the previous table but now for a different (smaller) set of years.
The difference in data is evidently due to
the different sources and authors for the data.
Table 17 (Paul Bairoch)
Industrial Potential

[U.K. in 1900 = 100]
Table 18 (Paul Bairoch)
Relative Share

Table 30 (Hillman)
Relative Share

1880 1900 1913 1928 1938 1880 1900 1913 1928 1938 1929 1932 1937 1938
Britain 73 [100] 127 135 181 23 18 14 10 11 9 11 9 9
United States 47 128 298 533 528 15 24 32 39 31 43 32 35 29
Germany 27 71 138 158 214 8 13 15 12 13 11 11 11 13
France 25 37 57 82 74 8 7 6 6 4 7 7 5 5
Russia 24 48 77 72 152 8 9 8 5 9 5 11 14 18
Austria-Hungary 14 26 41 --- --- 4 5 4 --- --- --- --- --- ---
Italy 8 14 22 37 46 2.5 2.5 2.4 2.7 2.8 3 3 3 3
Japan 8 13 25 45 88 2 3 3 4


[pages 244–7]

The role of foreign trade in the United States’ economic growth was small indeed
(around 8 percent of its GNP derived from foreign trade in 1913,
compared with Britain’s 26 percent),
but its economic impact upon other countries was considerable.
Traditionally, the United States had exported raw materials (especially cotton), imported finished manufacturers,
and made up the usual deficit in “visible” trade by the export of gold.
But the post-Civil War boom in industrialization quite transformed that pattern.
Swiftly becoming the world’s largest producer of manufacturers,
the United States began to pour its farm machinery, iron and steel wares,
machine tools, electrical equipment, and other products
onto the world market.

At the same time,
the Northern industrialists’ lobby was so powerful that it ensured that
foreign products would be kept out of the home market
by higher and higher tariffs;

raw materials, by contrast, or specialized goods (like German dyestuffs)
were imported in ever-larger quantities to supply American industry....

The consequences of this commercial transformation were, of course,
chiefly economic, but they also began to affect international relations.
The hyperproductivity of American factories and farms
caused a widespread fear that
even its enormous domestic market might soon be unable to absorb these goods,
and led powerful interest groups
(Midwestern farmers as well as Pittsburgh steel producers)
to press the government to give all sorts of aid to opening up,
or at least keeping open, markets overseas.
The agitation to preserve an “open door” in China
and the massive interest shown in making the United States
the dominant economic force in Latin America
were only two of the manifestations of this concern
to expand the country’s share of world trade.
Between 1860 and 1914
the United States increased its exports more than sevenfold
(from $330M to $2.4G),
yet because it was so protective of its own market,
imports increased only fivefold (from $360M to $1.9G).

Faced with this avalanche of cheap American food,
continental European farmers agitated for higher tariffs—which they usually got;
in Britain,
which had already sacrificed its grain farmers for the cause of free trade,
it was the flood of American machines, and iron and steel,
which produced alarm.
While the journalist W. T. Stead wrote luridly of
“the Americanization of the world” —
the phrase was the title of his book of 1902—
Kaiser Wilhelm and other European leaders hinted at
the need to combine against the “unfair” American trading colossus.


This growth of American industrial power and overseas trade
was accompanied, perhaps inevitably, by
a more assertive diplomacy and by an American-style rhetoric of Weltpolitik.
Claims to a special moral endowment among the peoples of the earth
which made American foreign policy superior to those of the Old World
were intermingled with Social Darwinistic and racial arguments,
and with the urging of industrial and agricultural pressure groups
for secure overseas markets.
The traditional, if always exaggerated, alarm
about threats to the Monroe Doctrine
was accompanied by calls for the United States
to fulfill its “Manifest Destiny” across the Pacific.
While entangling alliances still had to be avoided,
the United States was now being urged by many groups at home
into a much more activist diplomacy—
which, under the administrations of McKinley [25]
and especially Theodore Roosevelt [26],
was exactly what took place.
American administrations showed themselves willing to intervene
by diplomatic pressure and military means in Latin American countries
when their behavior did not accord with United States norms.

But the really novel feature of American external policy in this period were
its interventions and participation in events outside the western hemisphere.

[However,] except in Chinese affairs,
diplomatic activism was not maintained by T. Roosevelt [26]’s successors,
who preferred to keep the United States free from international events
occurring outside the western hemisphere.


[pages 327–9]

The relative power of the United States
in world affairs during the interwar years
was, curiously,
in inverse ratio to that of both the USSR and Germany.
That is to say, it was inordinately strong in the 1920s,
but then declined more than any other of the Great Powers
during the depressed 1930s,
recovering only (and partially) at the very end of this period.
The reason for its preeminence in the first of these decades
has been made clear above.
The United States was the only major country, apart from Japan,
to benefit from the Great War [i.e., World War I].
It became the world’s greatest financial and creditor nation,
in addition to its already being
the largest producer of manufactures and foodstuffs.
It had by far the largest stocks of gold.
It had a domestic market so extensive that massive economies of scale
could be practiced by giant firms and distributors,
especially in the booming automobile industry.
Its high standard of living and its ready availability of investment capital interacted in a mutually beneficial fashion
to spur on further heavy investments in manufacturing industry,
since consumer demand could absorb
virtually all of the goods which increased productivity offered.
In 1929, for example,
the United States produced over 4.5 million motor vehicles,
compared with France’s 211K, Britain’s 182K, and Germany’s 117K.
It was hardly surprising that there were fantastic leaps
in the import of rubber, tin, petroleum, and other raw materials
to feed this manufacturing boom;
but exports,
especially of cars, agricultural machinery, office equipment, and similar wares,
also expanded throughout the 1920s,
the entire process being aided by
the swift growth of American overseas investments.
Yet even if this is well known,
it still remains staggering to note that
the United States in those years was producing
“a larger output than that of the other six Great Powers taken together
and that
“her overwhelming productive strength was further underlined by the fact that
the gross value of manufactures produced
per head of population in the United States
was nearly twice as high as in Great Britain or Germany,
and more than ten to eleven times as high as in the USSR or Italy.

While it is also true that, as the author of the above lines immediately notes,
“that the United States’ political influence in the world
was in no respect commensurate with her extraordinary industrial strength,”
that may not have been so important in the 1920s.

In the first place,
the American people decidedly rejected a leading role in world politics,
with all the diplomatic and military entanglements
which such a posture would inevitably produce
provided American commercial interests were not deleteriously affected by
the actions of other states,
there was little cause to get involved in foreign events—
especially those arising in eastern Europe or the Horn of Africa.

Secondly, for all the absolute increases in American exports and imports,
their place in its national economy was not large,
simply because the country was so self-sufficient;
in fact,
“the proportion of manufactured goods exported
in relation to their total production
decreased from a little less than 10 percent in 1914
to a little under 8 percent in 1929,”
and the book value of foreign direct investments
as a share of GNP remained unaltered—
which helps to explain why,
despite a wide-spread acceptance of world-market ideas in principle,
American economic policy was much more responsive to domestic needs.
Except in respect to certain raw materials,
the world outside was not that important to American prosperity.

Finally, international affairs in the decade after 1919 did not suggest
the existence of a major threat to American interests:
the Europeans were still quarreling but much less so than in the early 1920s,
Russia was isolated, Japan quiescent.
Naval rivalry had been contained by the Washington treaties.
In such circumstances,
the United States could reduce its army to a very small size
(about 140,000 regulars),
although it did allow the creation of a reasonably large and modern air force,
and the navy was permitted to develop
its aircraft-carrier and heavy-cruiser programs.
While the generals and admirals predictably complained about
receiving insufficient resources from Congress,
and certain damaging measures were done to national security
(like Henry Stimson’s 1929 decision
to wind up the code-breaking service on the grounds that
“gentlemen do not read each others mail”),
the fact was that this was a decade in which the United States
still could remain an economic giant but a military middle-weight.
It was perhaps symptomatic of this period of tranquility that
the United States still did not possess
a superior civil-military body for considering strategic issues,
like the Committee of Imperial Defence in Britain
or its own later National Security Council.
What need was there for one when the American people
had decisively rejected the ideas of war?

The leading role of the United States
in bringing about the financial crisis of 1929
has been described above [6.1.12].
What is even more significant,
for the purposes of measuring comparative national power,
was that the subsequent depression and tariff wars
hurt it much more than any other advanced economy.
If this was partly due to
the relatively uncontrolled and volatile nature of American capitalism,
it was also affected by
the fatal decision to opt for protectionism by the Smoot-Hawley tariffs of 1930.
[This opinion is strongly contested by some,
including Patrick Buchanan in The Great Betrayal
and Clyde Prestowitz in The Betrayal of American Prosperity.]

Despite the complaints by U.S. farmers and some industrial lobbies
about unfair foreign competition,
the country’s industrial and agricultural productivity was such—
as the surplus of exports over imports clearly showed—
that a breakup of the open world trading order
would hurt its exporters more than any others.
“The nation’s GNP had plummeted from $98G in 1929
to barely half that three years later.
The value of manufactured goods in 1933 was less than one-quarter
what it had been in 1929.
Nearly fifteen million workers had lost their jobs
and were without any means of support ....
During this same period the value of American exports
had decreased from $5.24G to $1.61G, a fall of 69 percent.”
With other nations scuttling hastily into protective trading blocs,
those American industries which did rely heavily upon exports were devastated.
“Wheat exports, which had totaled $200M ten years earlier,
slumped to $5M in 1932.
Auto exports fell from $541M in 1929 to $76M in 1932.”
World trade collapsed generally,
but the U.S. share of foreign commerce contracted even faster,
from 14 percent in 1929 to less than 10 percent in 1932.
What was more,
while certain other major powers steadily recovered output by the middle to late 1930s,
the United States suffered a further severe economic convulsion in 1937
which lost much of the ground gained over the preceding five years.
But because of what has been termed the “disarticulated world economy” —
that is, the drift toward trading blocs
which were much more self-contained than in the 1920s—
this second American slump did not hurt other countries so severely.
The overall consequence was that in the year of the Munich crisis [1938],
the U.S. share of world manufacturing output was lower than
at any time since around 1910 (see Table 30).

Because of the severity of this slump,
and because of the declining share of foreign trade in the GNP,
American policy under Herbert Hoover [31] and especially under Roosevelt [32]
became even more introspective.


[pages 357–8]

Simply because much of the rest of the world
was either exhausted by the war
or still in a stage of colonial “underdevelopment,”
American power in 1945 was, for want of another term, artificially high,
like, say, Britain’s in 1815.
Nonetheless, the actual dimensions of its might
were unprecedented in absolute terms.
Stimulated by the vast surge in war expenditures,
the country’s GNP measured in constant 1939 dollars
rose from $89 billion (1939) to $135 billion (1945),
and much higher ($220 billion) in current dollars.
At last,
the “slack” in the economy which the New Deal had failed to eradicate
was fully taken up,
and underutilized resources and manpower properly exploited:
“During the war
the size of the productive plant within the country grew by nearly 50 percent
and the physical output of goods by more than 50 percent.”
[W. Ashworth, A Short History of the International Economy Since 1850, p. 268.]
Indeed, in the years 1940 to 1944,
industrial expansion in the United States rose at a faster pace—
over 15 percent a year—than at any period before or since.
Although the greater part of this growth was caused by war production
(which soared from 2 percent of total output in 1939 to 40 percent in 1943),
nonwar goods also increased so that the civilian sector of the economy
was not encroached upon as in the other combatant nations.
Its standard of living was higher than any other country’s,
but so was its per capita productivity.
Amoung the Great Powers,
the United States was the only country which became richer—
in fact, much richer
rather than poorer because of the war.
At its conclusion,
Washington possessed gold reserves of $20 billion,
almost two-thirds of the world’s total of $33 billion.

“… more than half the total manufacturing production of the world
took place within the U.S.A.,
which, in fact,
turned out a third of the world production of goods of all types.”

[Ashworth, loc. cit.]
This also made it by far the greatest exporter of goods at the war’s end,
and even a few years later it supplied one-third of the world’s exports.
Economically, the world was its oyster.



[pages 432–5]

Perhaps the only consolation to decision-makers in the Kremlin
was that
their archrival, the United States,
also appeared to be encountering economic difficulties from the 1960s onward
and that
it was swiftly losing the relative share
of the world’s wealth, production, and trade
which it had possessed in 1945.
Yet mention of that year is, of course,
the most important fact in understanding the American relative decline.
As argued above,

the United States’ favorable economic position at that point in history
was both unprecedented and artificial.

It was on top of the world
partly because of
its own productive spurt,
but also because of
the temporary weakness of other nations.

That situation would alter, against the United States,
with Europe’s and Japan’s recovery of prewar level of output;
and it would alter still further
with the general expansion of world manufacturing production
(which rose more than threefold between 1953 and 1973),
since it was inconceivable
that the United States could maintain its one-half share of 1945
when new factories and industrial plant were being created all over the globe.
By 1953, [Paul] Bairoch, calculates,
the American percentage had fallen to 45 percent;
by 1980 to 31.5 percent; and it was still falling.
For much the same reason, the CIA’s economic indicators showed
the United States’ share of world GNP dropping
from 26 percent in 1960 to 21.5 percent in 1980
(although the dollar’s short-lived rise in the currency markets
would see that share increase over the next few years).
The point was not that Americans were producing significantly less
(except in industries generally declining in the western world),
but that others were producing much more.
Automobile production is perhaps the easiest way
of illustrating the two trends which make up this story:
in 1960, the United States manufactured 6.65 million automobiles,
which was a massive 52 percent of the world output of 12.8 million such vehicles;
by 1980, it was producing a mere 23 percent of the world output,
but since the latter totaled 30 million units,
the absolute American production had increased to 6.9 million units.

Yet despite that half-consoling thought—
similar to the argument which the British used to console themselves
seventy years earlier when their shares of world output began to be eroded—
there was a worrying aspect to this development.
The real question was not “Did the United States have to decline relatively?”
but “Did it have to decline so fast?
For the fact was that even in the heyday of the Pax Americana,
its competitive position was already being eroded by
a disturbingly low average annual rate of growth of output per capita,
especially as compared with previous decades.

Once again, it may be possible to argue that
this was a historically “natural” development.
As Michael Balfour remarks, for decades before 1950
the United States had increased its output faster than anyone else
because it had been a major innovator
in methods of standardization and mass production.
As a result, it had
“gone further than any other country to satisfy human needs
and [was] already operating at a high level of efficiency
(measured in terms of output per man per hour)
so that
the known possibilities for increasing output
by better methods or better machinery
were, in comparison with the rest of the world, smaller.”
Yet while that was surely true,
the United States was not helped by certain other secular trends
which were occurring in its economy:
  1. fiscal and taxation policies encouraged high consumption
    but a low personal savings rate;

  2. investment in R&D, except for military purposes,
    was slowly sinking compared with other countries; and

  3. defense expenditures themselves, as a proportion of national product,
    were larger than anywhere else in the western bloc of nations.
In addition, an increasing proportion of the American population
was moving from industry to services, that is,
into low-productivity fields.
[See Lester Thurow, The Zero-Sum Society, passim, but espec. chs. 1 and 4.]

Much of this was hidden during the 1950s and 1960s
by the glamour developments of American high technology
(especially in the air),
by the high prosperity
which triggered off consumer demand for flashy cars and color televisions, and
by the evident flow of dollars
from the United States to poorer parts of the world,
as foreign aid, or
as military spending, or
as investment by banks and companies.
It is instructive in this regard to recall
  1. the widespread alarm in the mid-1960s
    at what Servan-Schreiber called le défi Americain
    the vast outward surge of U.S. investments into Europe
    (and, by extension, elsewhere),
    allegedly turning those countries into economic satellites;

  2. the awe, or hatred,
    with which giant multinationals like Exxon and General Motors
    were regarded;
    and, associated with these trends,

  3. the respect accorded to the sophisticated management techniques
    imbued by American business schools.
From a certain economic perspective, indeed,
this transfer of U.S. investment and production
was an indicator of economic strength and modernity;
it took advantage of lower labor costs
and ensured greater access in overseas markets.
Over time, however, these capital flows eventually became so strong
that they began to outweigh
the surpluses which Americans earned
on exports of manufactures, foodstuffs, and “invisible” services.
Although this increasing payments deficit
did see some gold draining out of the United States by the late 1950s,
most foreign governments were content to hold more dollars
(that being the leading reserve currency)
rather than demand payment in gold.

As the 1960s unfolded, however, this cozy situation evaporated.
Both Kennedy [35] and (even more) Johnson [36]
were willing to increase American military expenditures overseas,
and not just in Vietnam,
although that conflict turned the flow of dollars exported into a flood.
Both Kennedy [35] and (even more) Johnson [36]
were committed to increases in domestic expenditures,
a trend already detectable prior to 1960.
Neither administration liked the political costs of raising taxes
to pay for the inevitable inflation.
The result was year after year of
federal government deficits,
soaring price rises, and
increasing American industrial uncompetitiveness—
in turn leading to
larger balance-of-payment deficits,
the choking back (by the Johnson [36] administration)
of foreign investments by U.S. firms, and then
the latter’s turn toward the new instrument of Eurodollars.
In the same period,
the U.S. share of world (non-Comecon) gold reserves shrank relentlessly,
from 68 percent (1950) to a mere 27 percent (1973).
With the entire international payments and money-flow system
buckling under these interacting problems,
and being further weakened by de Gaulle’s angry counterattacks
against what he regarded as America’s “export of inflation,”
the Nixon [37] administration found it had little choice
but to end the dollar’s link to gold in private markets,
and then to float the dollar against other currencies.
The Bretton Woods system, very much a creation
of the days when the United States was financially supreme,
collapsed when its leading pillar could bear the strains no more.

The detailed story of the ups and downs of the dollar in the 1970s,
when it was floating freely, are not for telling here;
nor is the zigzag course of successive administrations’ efforts
to check inflation and to stimulate growth,
always without too much pain politically.
The higher-than-average inflation in the United States
generally caused the dollar to weaken
vis-à-vis the German and Japanese currencies in the 1970s;
oil shocks [1973, 1979],
which hurt countries more dependent upon OPEC supplies (e.g., Japan, France),
political turbulence in various parts of the world, and
high American interest rates
tended to push the dollar upward, as was the case by the early 1980s.
Yet although these oscillations were important,
and tended to add to global economic insecurities,
they may be less significant for our purposes
than the unrelenting longer-term trends, which were
  1. the decreasing productivity growth,
    which in the private sector fell
    from 2.4 percent (1965–72),
    to 1.6 percent (1972–77),
    to 0.2 percent (1977–82);

  2. the increasing federal deficits,
    which could be seen as giving a Keynesian-type “boost” to the economy,
    but at the cost of sucking in so much cash from abroad
    (attracted by the higher American interest rates)
    that it sent the dollar’s price to artificially high levels
    and turned the country
    from a net lender to a net borrower; and

  3. the increasing difficulty American manufacturers found in competing with imported automobiles, electrical goods, kitchenware,
    and other manufactures.
Not surprisingly,
American per capita GNP, once the highest in the world,
began to slip down the list.

There were still consolations,
to those who could see the American economy and its needs
in larger terms than
selected comparisons with Swiss incomes or Japanese productivity.
As David Calleo points out,
post-1945 American policy did achieve some very basic and significant aims:
  1. domestic prosperity, as opposed to a 1930s-type slump;

  2. the containing of Soviet expansionism without war;

  3. the revival of the economies—and the democratic traditions—
    of western Europe, later joined by Japan
    to create “an increasingly integrated economic bloc,” with
    “an imposing battery of multilateral institutions ...
    to manage common economic as well as military affairs”;
    and finally

  4. “the transformation of the old colonial empires
    into independent states
    still closely integrated into a world economy.”
In sum,
it had maintained the liberal international order,
upon which it, itself, increasingly depended;
and while its share of world production and wealth had shrunk,
perhaps faster than need have been the case,
the redistribution of global economic balances
still left an environment
which was not too hostile to its own open-market and capitalist traditions.
if it had seen its productive lead eroded by certain faster-growing economies,
it had still maintained a very considerable superiority over the Soviet Union
in almost all respects of true national power and—
by clinging to its own entrepreneurial creed—
remained open to the stimulus of managerial initiative and technological charge
which its Marxist rival would have far greater difficulty in accepting.


A more detailed discussion of the implication of these economic movements
must await the final chapter.
It may, however, be useful to give in statistical form (see Table 43)
the essence of the trends examined above, as they concern the global economic balances, namely the partial recovery of the share of the world product in the hands of the less-developed countries; the remarkable growth of Japan and, to a lesser extent, of the People’s Republic of China; the erosion of the European Economic Community’s share even as it remained the largest economic bloc in the world; the stabilization, and then slow decline of the USSR’s share; and the much faster decline, but still far larger economic muscle of the United States.

Indeed, by 1980, the final year in Table 43, the World Bank’s figures of population, GNP per capita, and GNP itself, were very much pointing to a multipolar distribution of the global economic balances, as shown in Table 44.

Table 43.
Shares of Gross World Product, 1960–1980

1960 1970 1980
Less-developed countries 11 12 15
Japan 4.5 8 9
China 3 3 4.5
European Economic Community 26 25 22.5
United States 26 23 21.5
Other developed countries 10 10 10
USSR 12.5 12 11
Other Communist countries 7 6 6

Table 44.
Population, GNP per Capita, and GNP in 1980
GNP per Capita
United States 228 11,360 2,590
USSR 265 4,550 1,200
Japan 117 9,890 1,160
EEC (12 states) of which 317 --- 2,910
W. Germany 61 13,590 830
France 54 11,730 630
U.K. 56 7.920 440
Italy 57 6,480 370
W. and E. Germany combined 78 --- 950
China 980 290 or 450 280 or 440

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