Economic change and development Flashcards
Introduction:
In the years from 1890 to the First World War, the United States emerged as the world’s leading economy. The driving force behind this spectacular economic growth was industrialisation: the massive increases in output and productivity as American industry modernised, and the natural resources of a continental nation were fully exploited. Industrial growth was accompanied by a ‘golden age of agriculture’ in the early twentieth century, stimulated by new techniques and favourable market conditions
Economic expansion was not trouble-free. There were times when the industrial economy slowed down in between massive surges in growth. In the 1890s, American agriculture experienced very difficult times, leading to social unrest and political protest movements. Banking and finance struggled to keep pace with the size and complexity of economic growth, and there were major financial crises: especially the Panic of 1893, when the financial crash led to years of a ‘Great Depression’ affecting the wider economy; and the Panic of 1907, when a similarly damaging depression was only averted by desperate emergency measures organised by business leaders
The power and influence of ‘industrial capitalism’ aroused resentment and opposition from farmers, industrial workers and Progressives. This reaction against big business prompted demands for more effective regulation, and for more government intervention in the economy. But, overall, there was unstoppable economic growth and prosperity
The rise of US dominance as an economic and industrial power:
The United States was already a rising economic power by 1890. There had been industrial expansion and the development of modern transportation systems. Big business was already big: men like Cornelius and William Henry Vanderbilt, Andrew Carnegie, and John D. Rockefeller had laid the foundations of their huge business empires. Mass immigration provided a flexible supply of labour. It was clear that America was destined to become a world industrial power. In the early 1890s, however, the US was still a net importer, both of goods and finance. Britain, challenged by Germany, was still seen as the greatest force in the international economy. All this was to change in the dynamic growth of the American economy in the years after 1890 during the ‘Second Industrial Revolution’
Between 1895 and 1913, the American economy achieved ‘take-off’. There were two intense surges in American manufactured exports: first an increase of 90% between 1895 and 1900, and then another surge of 77% between 1908 and 1913. By 1913 the United States was a net exporter
American exports were increasingly concentrated on iron, steel, copper, and oil. American productivity was better than Britains; American export prices were lower. European competitors were alarmed by this spectacular growth - they called it the ‘American Commercial Invasion’
Reasons for explosive economic growth in America:
There were many reasons for the explosive growth of the American industrial economy after 1895
One was efficiency: US industries had higher productivity, through innovation and efficient management methods. Another was the labour supply, as the influx of immigrants reached peak levels. A third was rising world demand, and the inability of European producers to keep pace with it. Above all, American industry benefited from vast natural resources. As the American economist Douglas Irwin stated in 2001: ‘resource abundance formed the basis for the US export success around the turn of the century’
One key example of this was the discovery of high-grade iron ore in the Messabe range of hills in Minnesota in 1892. By 1907, US Steel had bought up 75% of the Messabe ore. An excellent transportation network allowed iron ore to move smoothly from Duluth on Lake Superior through the Great Lakes to the steel mills in Ohio and Pennsylvania. Steel production went up by 400% by 1913
The development of huge new oilfields in Oklahoma, California, and Texas expanded the position of the US as the world’s leading oil producer. By 1910 US oil production equalled that of the rest of the world combined. The Spindletop oil gusher at Beaumont in Texas was one of the biggest ever discovered. There was massive growth in the production and consumption of coal and electric power, in shipping and shipbuilding on the West coast, in the construction industry, and in urban transport
This booming economy was underpinned by favourable political circumstances. There was only limited regulation of business, with many governments - both at state and federal level - sympathetic to business interests. This was particularly true of the long period of Republican political dominance from 1896 to 1912
American industrial expansion was part of a new global economy. The United States was perfectly placed to exploit the economic opportunities of an interconnected world, brought together by the movement of people, goods, and finance. World shipping routes stretched across the Atlantic and the Pacific; so did undersea telegraph cable networks. Canada to the north and Latin America to the south provided the United States with peaceful trading partners, easily drawn into the American economic system
Developments in agriculture:
Despite the surge in industrial growth and urbanisation, agriculture and the rural economy remained highly significant in the United States. The United States was a world leader in the production of wheat, corn and other grains. Cotton was still the foundation of the economy in the South. Grain, cotton, meat, and other agricultural products continued to be important exports
Agriculture: hardship and protest
In the 1890s, American agriculture was in crisis, and the years of depression following the 1893 Panic intensified the problems in agriculture. Small farmers in the South and West faced difficult economic conditions, with falling prices for what they produced and a shortage of credit. The agricultural economy was volatile, subject to wild swings between prosperity and hardship. Railroads transformed the countryside almost as much as they transformed urban industrial America. Farmers became part of a wider commercial network, more and more dependent upon railroad companies and banks in order to invest in seed, livestock, equipment and fertilisers. This made them vulnerable to market forces beyond their control
This vulnerability was especially noticeable in the agricultural economy in the South. ‘Big agriculture’ (tobacco, sugar, and cotton) still provided the basis of the Southern economy. The promises to empower black farmers in a new age of land and freedom were not fulfilled. A small number of African-Americans became independent farmers but most remained trapped in as ‘sharecroppers’. Small white farmers were only a little better off, struggling to raise the finance needed to invest in improved methods
Agriculture: hardship and protest (Trans-Mississippi West)
Another example of the vulnerability of small farmers was the rush of farm settlements in the Trans-Mississippi West. In the late 1880s and the 1890s, there was a huge expansion of farm settlements in states such as Missouri, Nebraska, Oklahoma and Colorado, as people changed their view of the Great Plains as the ‘Great American Desert’. Thousands of new farms and homesteads covered these territories, many of them established on marginal land. But two significant factors ensured that the apparent success of the early years turned out to be illusory
The first factor was banking and credit. The optimism of the early land rush was fuelled by readily available ‘easy credit’ - loans from banks and land companies that were based on unrealistic expectations of farmers’ ability to repay them. When the credit boom subsided, many small farmers were mired deep into debt and unable to access the loans they needed. This was a key reason for the swell of protest from Western and Southern farmers that led to the rise of Populism. The agricultural crisis was intensified by the impact of the Panic of 1893, which led to three years of economic depression that hit farmers hard
The second factor causing problems for Western farmers was the climate. When the rush of settlement began in the 1880s, it was during a period of unusually high annual rainfall that made even marginal land fertile and productive. But these levels of rainfall were an anomaly. Normal dry climatic conditions returned after 1887, leaving farmers vulnerable to drought and wind erosion. Many were made bankrupt and forced to move back east
The ‘golden age’ of American agriculture:
In the years after 1900 there were dramatic improvements in the situation of American farmers, as the expanding domestic economy boosted the demand for agricultural production. Exports also increased. Modernisation and mechanisation spread more widely, helped by farmers’ cooperatives. The federal government aided agriculture by the Reclamation Act of 1902, helping irrigation schemes in dry areas; the Meat Inspection Act of 1906, to regulate food quality; the Federal Farm Loan Act of 1916; and the Vocational Education Act of 1917. Above all, from about 1905 there was ‘parity’ in the relationship between agricultural prices and incomes, putting farmers at the same levels of
‘buying power’ as the general economy. This enabled large increases in the land under cultivation. There was a boom in the output of wheat and corn
The agricultural ‘golden age’ was enhanced by the outbreak of a general European war in 1914. This dislocated world markets and badly damaged the output of America’s international competitors. Many farmers were able to buy more land, secure in the knowledge they would receive good prices for everything they could produce. These boom years were, however, slightly misleading. There was bound to be a slackening of demand once international markets recovered after the First World War, and much of the new land brought under cultivation in the boom years was ‘submarginal’ land that was only profitable as long as exceptionally high prices persisted
The impact of economic change:
Between 1890 and 1914, urbanisation changed the face of America. There was a vast increase in urban populations and in the range of economic activity. This was not only true of the United States. There was a similarly rapid expansion of big cities in Europe and the wider world, such as Budapest, St Petersburg and Buenos Aires; but in the United States the process of urban transformation was exceptionally quick. The population of New York City had already doubled between 1870 and 1890; by 1910 it had doubled again. By 1900 there were 38 American cities with a population of 100,000 or more. These cities were magnets for new inhabitants, resulting in astonishing population density and creating new markets
Regional differences:
In the South there was urbanisation: the development of the oil industry in Texas and Louisiana led to the expansion of established cities like New Orleans, and started the growth of some major cities of the future, like Houston and Atlanta. But the Southern economy continued to be dominated by plantation products such as tobacco, sugar and, above all, ‘King Cotton’. Urbanisation moved more slowly and on a smaller scale than in the industrial Northeast
The Western economy was still distant and isolated, dominated by extractive industries, subject to sudden booms and busts, and heavily dependent on Eastern financial interests for investment. There were sudden spurts of expansion and urbanisation, as with the growth of the port cities on the West coast, and Denver in Colorado
In the late 1890s, the great Alaska-Yukon Gold Rush stimulated rapid development in Alaska itself and in the Pacific coast ports of Seattle and San Francisco. The gold rush was important economically for almost doubling the size of US gold reserves, at a time when the debate about the gold standard was at its peak and the money supply depended upon the size of gold reserves (it was in 1900 that President McKinley brought in the Gold Standard Act).
But its chief importance was in sparking the wider economy of the West
At about the same time, the Pacific war against Spain and the increasing trade with China also boosted the West coast ports. Potrero Point in San Francisco became an important centre for shipbuilding and maritime trade
The Alaska-Yukon Gold Rush:
From the original California gold rush of 1849, the history of the West was marked by sudden flurries of gold and silver mining. One of the biggest of all gold strikes occurred in 1896, at Klondike Creek in the Yukon territory of Canada, close to the Alaska border. Thousands upon thousands of prospectors joined the rush to this remote inaccessible region. Dawson City became briefly one of the biggest cities in the West. Then in 1899 the focus shifted to a massive new gold strike, at Nome on the Pacific coast of Alaska
Economic change and big business:
Economic expansion was not continuous or smooth. There were extensive pockets of poverty in many of the big cities and in many poorer regions, such as Appalachia. Growth was punctuated by periods of depression. Farmers reacted strongly against hard times in the 1890s. Industrial workers responded to low wages and harsh conditions by organising trade unions and resorting to strike action. The stock market and the banking system were often unstable and unreliable, leading to demands for regulation and reform. Two major financial crises, the Panics of 1893 and 1907, intensified the reaction against big business
There were major outbreaks of industrial unrest. At Homestead in Pennsylvania in 1892, 13 steelworkers were killed in a pitched battle against strike-breakers brought in by the Carnegie Steel Company. Federal troops had to be sent in to put down a violent strike at a silver mine in Idaho. In 1893 the Great Northern Strike by the American Railway Union (ARU), led by Eugene Debs, forced the railroad bosses to make concessions. This was followed in 1894 by a strike by workers at the Pullman works in Illinois that spread nationwide, shutting down large parts of the railroad network
The Panic of 1893 began with the slowing down of the railroad boom and the sudden bankruptcy of the Philadelphia and Reading Railroad, but it had more wide-ranging causes. Gold reserves were already falling before 1893 and the money supply was insufficient to finance the scale of economic activity. The stock market collapsed and hundreds of banks failed. There was a general economic slump lasting three years. This depression of 1893 to 1897 was generally known as the ‘great depression’, until that title was transferred to the 1930s slump that followed the Wall Street Crash of 1929
Financial Panic of 1907:
In October 1907 the boom years of the economy were interrupted by another major financial panic. This was a time of relatively slow growth, in between the surges of 1895-1900 and 1908-1913, and the banking system was struggling to keep pace with the expansion of industry. The Panic of 1907 was triggered by the collapse of the third-largest trust in New York, the Knickerbocker Trust Company. The New York stock exchange fell by nearly 50%. Many banks, both local and national, went under
At that time there was no central bank to prop up the banking system, and the 1907 panic might well have spiralled out of control but for the intervention of J. Pierpont Morgan, who put up millions of dollars to restore business confidence and prompted other financiers to do the same. Unlike the panic of 1893 (or the Wall Street Crash of 1929), the 1907 crash was overcome relatively quickly. It was, however, a warning sign of the weakness of the regulation of the banks. It was also a stark illustration of the inability of governments to curb the vast financial power of J.P. Morgan. Soon afterwards, Senator Aldrich of Rhode Island headed a commission to investigate the possibility of establishing a Federal Reserve central bank; this was brought into effect by President Wilson in 1913
The American economy and the First World War:
From 1914 the American economy was boosted by the consequences of the outbreak of the First World War in Europe. This war was widely expected to be intense but short; however, the reality proved to be a long, deadlocked struggle that was to last for years and drain the resources of the warring powers. When the war began, the US economy was in recession. The colossal spending on war supplies by Britain and her allies stimulated rapid growth in American industry and agriculture. Throughout the long period of US neutrality there was a sustained economic boom
British purchasing agents were already busy in the United States from September 1914. Firms such as US Steel, the US Cartridge Company, and the Baldwin Locomotive Company expanded production to full capacity. Baldwin produced 5,500 military locomotives and 6 million artillery shells for the Allies between 1914 and 1918. American farmers were able to expand production for export to war-torn Europe. Food supplies were almost as important to the Allied war effort as weapons. Unemployment fell steadily. Samuel Gompers and the AFL cooperated enthusiastically with the employers because it was good for jobs and wages. In 1914 President Wilson appointed Gompers to his Council of National Defence
The war in Europe also opened vast opportunities for American financiers.
J.P. Morgan & Company made agreements with French bankers and with the Bank of England; they became the sole underwriter of Allied war bonds. As the war progressed, Allied dependence on American loans grew ever greater. Bankers and industrialists were quick to recognise the benefits of supporting the Allied war effort in this one-sided form of neutrality
Summary:
In the years after 1890 the United States experienced an economic transformation: in population growth, in technical innovation, and in the exploitation of rich natural resources. On the eve of American entry into the First World War, the American economy was already a world leader in size, potential and productivity. The years of active American involvement in the war speeded up economic development and accentuated modernisation. American economic dominance was to influence the outcome of the war, and the post-war settlement that followed
