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The Economy of The United States

The United States is the world’s third largest country in terms of both total land area and population.  It also boasts the world’s largest single national economy, with an estimated nominal Gross Domestic Product (GDP) of 16.62 trillion as of 2012, approximately 25 percent of the nominal global GDP.1  Its GDP at purchasing power parity is also the largest of any single country in the world, approximately 20 percent of the world’s total.  The United States has a mixed economy and has maintained a stable overall GDP growth rate, a moderate employment rate, and high levels of research and capital investment.  Its five largest trading partners are Canada, China, Mexico, Japan and Germany.
 
As the world’s largest economy, many of the world’s chief financial and economic institutions can be found in the United States. The country is home to the world’s largest stock exchange, the world’s largest gold depository and reserves, and 139 of the world’s 500 largest companies, a number which is almost twice that of any other country.2
 
The United States has had the world’s largest national economy since at least the 1890s.  It is currently the world’s largest manufacturer, representing nearly 20 percent of the world’s manufacturing output.  The labor market in the United States has always, and continues to attract immigrants from around the globe and its net migration rate is among the highest in the world.  According to the “Ease of Doing Business Index” and the “Global Competitive Report,” among other studies, the United States is one of the top-performing economies, and the country is ranked first globally in the “IT industry Competitive Index.”3
 
The United States has a great quantity of natural resources.  Apart from having the world’s largest proven reserves of coal—22.6 percent of the world’s total—the U.S. also boasts the 14th largest proven oil reserves and the sixth-largest proven natural gas reserves.  Other natural resources that are plentiful in the country include lead, copper, phosphates, gold, iron, mercury, silver, nickel, molybdenum, uranium, bauxite, tungsten, potash, zinc, and timber.
 
Wall Street Photo credit Today the economy of the United States is slowly recovering from the economic downturn which followed the Financial Crisis of 2007-2008.  As of last month, the unemployment rate was 7.3 percent (approximately 11 million people).  Extreme poverty in the United States, meaning households living on less than $2 per day before government benefits, doubled from 1996 levels to 1.5 million households, including 2.8 million children.  80 percent of all financial assets in the country are possessed by the wealthiest 10 percent of Americans.4
 
In the following article we will take a closer look at the history and evolution of the United States economy, from its colonial roots to the present day.

Economy of the United States:  Colonial America to the Present Day

The original thirteen colonies established their economic independence thanks to ingenuity, the frontier, and plenty of help from France and its allies.  From these meager beginnings, the United States—and its national debt—were born, and both have grown seemingly without limits.  However, in the years leading up to the United States 250th birthday, grave questions about the sustainability of America’s economic practices have emerged.  Once the world’s most powerful economic forces, in the twentieth century America assumed its position as the financial capital of the world.  However, as the country’s trade deficit continues to grow, much of its enormous debt is now controlled by China,5 and a transfer of power seems to be in progress.  But even while embroiled in economic recession, the model of the American Dream is still holding on by a thread.  Whether or not the United States can emerge unscathed in the next several years remains to be seen.  It is a complicated economic question, and one that cannot be untangled from the global economy.
 
Colonial America (Pre-Independence)
 
The economy of America during its colonial era was based predominantly on agriculture.  Even as the economy expanded through the early and mid 1700s, the colonies only made small progress towards industrialization prior to its independence.  Ironically, compared to the economy of the twentieth and twenty-first centuries, the economy of the 13 colonies was actually quite stable.6  Vibrant economic expansion began to occur with population growth from births and immigration, but colonial Americans had naturally become increasingly self-sufficient.
 
The early hardships of European settlers to America are well-known and documented, but gradually the prosperity in the north from fishing and the fur industries boosted the local economy.  As population growth, foreign trade (mostly agriculture), and general economic expansion afforded the colonies the ability to sustain themselves, many notable Americans, including Benjamin Franklin, predicted that the “balance of political and economic power will shift from the British Empire across the Atlantic to the colonies”7—which is exactly what happened.
 
By 1776, the standard of living of free white American society was already high, thanks largely to an abundant supply of food and land supporting a relatively high median income.  After the United States of America was officially sanctioned as a sovereign nation by the Treaty of Paris in 1783, the global economy of the country was officially born.
 
The Early Years (Pre-Civil War 1787-1850s)
 
In the years following the writing and ratification of the United States Constitution, the economy of the country saw tremendous growth.  The Constitution itself laid out a type of economic charter, outlining the regulation of both commerce and money by the United States Congress.8  Even more significantly, the Constitution opened the market of the United States territory.  By essentially opening up its borders, the new country allowed for an internal free flow of goods and ideas.  One glaring exception was the tax on whiskey signed into law in 1791—an unpopular tax aimed at helping the country pay down its national debt owed to mostly to France as a result of the War of Independence.  Starting in 1788, the newly independent United States saw productivity growth amounting to roughly 2% per year.9  Owing to a strong economic foundation borrowed from the British, The American economy rapidly caught up to that of its former ruler.
 
The young United States elected its first president (George Washington) in 1789, and while goods were certainly abundant during this era, industry was not.  This would soon change, however, thanks in large part to an unprecedented period of American entrepreneurship.  Soon the country would see the development of distinct regional economic character, with shipyards thriving in New England, crops and furs abounding in the middle colonies, and the plantation economy of the Old South.  Also in 1789, the textile industry of the United States was revolutionized, thanks to a man Named Samuel Slater, a textile apprentice of a British mill who immigrated to the United States.  Prior to leaving England, Slater memorized the blueprint for a piece of proprietary manufacturing equipment, and from memory he rebuilt the machine in the United States.10 
 
Washington was a huge proponent of U.S. industry, during a time in which most Americans worked in the agricultural field as subsistence farmers.  The push for a more industrialized nation was slowed, however, with the election of America’s third president, Thomas Jefferson, a major supporter of the agricultural industry.  With support from some of the most significant Southern leaders, Jefferson stressed an agrarian America with minimal government involvement.
 
Opposing Jefferson’s viewpoint was the United States’ first Secretary of State, Andrew Hamilton.  Hamilton, along with his Federalist Party, advocated for a strong central government as a way to encourage manufacturing and commerce as the foundation of a fledgling American economy.  Hamilton also pushed for a national U.S. bank as a way to back a strong currency and push through policies that would help accumulate capital to support American industry.11
 
The Southern proponents of Jefferson’s agrarian-based economy, meanwhile, had been looking for an agricultural revelation of some type, especially as other territories began competing with America’s tobacco industry.  They would realize this revelation with the invention of the cotton gin, a simple yet extremely time-saving device invented by Eli Whitney in 1793.  This machine, coupled with slave labor, elevated the South to a virtual economic empire.12
 
The first half of the 19th century saw an opening of the American frontier through the Louisiana Purchase, which effectively doubled the size of the country, and an economy bolstered by transportation.  Government-sponsored waterways such as the Erie Canal opened up new regions to western settlers, while improvements in water transportation, most notably the invention of the steamboat, allowed for better movement along the Mississippi River and its tributaries.  After the golden age of the steamboat—after the 1840s—a new type of transportation, the railroad, became the core of the American economy and raised it to an all-time high.  The railroad forever linked the east with the west in 1869, with the completion of the Transcontinental Railroad.13  Railways became the primary economic sector in the latter half of the 19th century, backed by government land grants and multi-national investments.  By this time, however, the American economy would be directly affected by two major events:  the Gold Rush and the American Civil War.
 
The Gold Rush and Civil War
 
The Gold Rush Photo credit When Gold was first discovered in California in 1848, not only did the event cause America to experience a major population shift, with thousands of people heading out West, it also shifted the balance of economic attention in the country.  By the time the first shots of the Civil War were fired in 1861, gold not only backed the American currency, it became an indirect funder of the Northern war effort, due to its role in Northern industry.14  Soon after, however, both the North and South resorted to paper currency.  Inflation rose exponentially on both sides, but particularly in the South, which lacked the institutional power of the North, which had both an established Treasury and a revenue gathering system.  For instance, in 1861 the first federal income tax was established in America, as was the early predecessor to today’s Internal Revenue Service (IRS).  The Civil War also caused the national debt to spike, rising to eighty times its pre-Civil War size.15
 
In the years leading up to the Civil War, the North and South, as well as the two political parties that represented them, were divided over the question of slavery.  The question was answered after four years of bloodshed, the Emancipation Proclamation of 1863, and the eventual victory of the North.  Abraham Lincoln, who led the country during this troubled time, had northern industrial interests to preserve, which led to a tariff on foreign goods in 1861.  Furthermore, the war itself helped to greatly bolster the Northern industrial economy, which would continue to persevere and flourish for decades after.
 
Reconstruction and World War I
 
After the Civil War was finally decided, the American South lay in ruins, and the slave-supported plantations were divvied up.  Slavery was replaced by tenant farming and sharecropping, but despite any visions the North may have had for racial harmony, segregation became the rule in the South.
 
By the Civil War, already 33 percent of the national economy was attributed to manufacturing, most of which was in the north.  After the war, the American economy underwent a period of tremendous industrial growth, driven by innovation and invention that resulted in mass production.  Small business enterprises became the foundation of the United States economy during this “Gilded Age,” built by entrepreneurs in manufacturing and commerce, which outpaced the economic contribution of agriculture by the 1880s.16
 
With the start of the 20th century, steam and water-based industries received a jolt with the invention of electricity and the first automobile, both of which helped to further the United States economy.  Manufacturing was at an all-time high leading up to World War I, when the industry shifted its focus and raw materials to the production of war time equipment and supplies.  As during the Civil War, the focus of the American economy during World War I was placed on financing he military and supporting the soldiers.17
 
The War Revenue Act of 1917 raised American taxes while the government sold war bonds to the general public and the newly founded American reserve.  At the time, the United States was clinging to a gold standard to back its currency, so avoiding simply printing additional money was meant to preserve the standard, while preventing inflation.18  However, the war changed the American economy in a number of ways.  Taxes were lowered somewhat following the war, but were still higher than before it.  The Federal Reserve assumed a more dominant role, and New York became the financial center of the world.  Prosperity in the 1920s was driven largely by post-war consumerism, but when that decade ended with the crash of the stock market in October of 1929, the government was forced to step in and assume a larger role in the American economy.19
 
The Great Depression and World War II
 
No discussion of the American economy would be complete without mention of the Great Depression, which spanned roughly 10 years, from 1929-1939.  While the exact causes of this major economic downturn are too numerous to mention, their effects were disastrous to the American economy.  At its height, the Great Depression saw unemployment rise to nearly 25 percent, hundreds of banks—nearly 40 percent of the American total—failed, and millions of Americans lost their life savings.  The stock market crash of 1929, often seen as the impetus of the Great Depression, wiped out millions of investors and crippled the confidence of businesses and the American people.20
 
When Franklin Delano Roosevelt was elected president in 1932, he launched a vast economic stimulus plan known as the “New Deal.” Among other aspects of this plan, it provided government-sponsored work on America’s roads and in national parks, insured banks through the Federal Deposit Insurance Corporation (FDIC) as a way to lure people and businesses back to the banks, and offered low cost housing through the Federal Housing Administration.21  While these government-run programs did work to some degree in stimulating the economy, the largest economic boost would not come until 1941—the year the United States declared war on Japan and her allies after the bombing of Pearl Harbor.
 
The New Deal created a close relationship between government and private industry, one that would continue into World War II, when the country’s industrial sector was once again mobilized and coordinated by the government to contribute directly to the war effort.  With most able-bodied men away at war, many of the factories were staffed with women.  Unemployment hit an all-time low of 1.2 percent, and the Gross National Product rose 50 percent between 1941 and 1945.  Meanwhile, the American population was becoming increasingly urban, as wartime technology made agriculture more mechanized.22
 
Post World War II to the Present
 
The economy of the United States continued to grow after the war, and with Europe and Asia laying in virtual ruin, the country became a superpower, both politically and economically.  The post-war baby boom was just one of the results of the war that led to greater consumer spending and confidence, and the U.S. middle class became dominant.  The Federal Highway Act of 1956 led to an explosion in suburb communities, as well as millions of jobs in improving America’s infrastructure.  The Interstate Highway System in America is still the largest public works project completed by any country in the world’s history.23
 
IRS building Photo credit The middle of the twentieth century saw a brief expansion in labor unions, and President Lyndon Johnson’s “Great Society” afforded greater economic opportunity to women and minorities.  The United States Congress helped support new federal spending to care for the elderly and poor, namely Medicare and the Food Stamp program.  Economic trouble was seen in the 1970s, however, resulting largely from the Vietnam War and high domestic spending.  Meanwhile, the government wrestled with inflation and reverberations from global crises that drove oil prices up and consumer discontent high.
 
When Ronald Regan was elected president in 1980, replacing one-term President Jimmy Carter, America was embroiled in recession and inflation had hit its highest point since World War I.  Reagan was elected on promises of smaller government as well as lower taxes and increased deregulation, but he failed to decreased government spending.  The result was major increases in both the budget deficit and national debt as the U.S. government was forced to borrow heavily from other countries.24
 
Although a minor recession would again come to the U.S. in the early 1990s, the economy would quickly recover thanks to consumer confidence and spending.  The economy of the decade was driven by the rise of technology and the Internet, whose companies made unprecedented gains on the market.
 
Today the economy of the United States is still recovering from the economic crisis of 2007-2008, leading to bailouts of banks and the United States automobile industry.  At its peak the recession saw unemployment climb to around 15 percent, with millions of Americans either out of work or vastly underemployed.  The crisis can be traced back to a number of suspect decisions and practices, but high on that list is the dubious and unregulated lending practices of the big banks, which loaned money to unqualified applicants and later had to foreclose on many of those buyers.25 
 
The “Services” sector is by far the largest economic sector in the United States.  Other sectors that currently help drive the economy include agriculture; arts and entertainment; banking and investment; healthcare and medicine; housing; manufacturing; media and communications; retail; self-employment/small business; transportation; and travel and tourism. United States firms are at or near the top in the world in terms of technological advances, especially in computers, as well as in medical, aerospace, and military equipment, although their advantage has narrowed since the end of World War II.26  
 
As the largest or one of the largest economies in the world, any fluctuations in the United States economy tend to have a far-reaching impact on other economies around the world. Ever since the 1960s, the US economy has been primarily responsible for absorbing global savings. Despite the challenge from emerging economies like China, the U.S. remains the most heavily invested-into country in the world, with the stock of direct foreign investments at home worth $2.824 trillion as of 2012. The United States is also still the largest investor in the world, investing $4.768 trillion abroad as of 2012.27

References
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