05 May 2008

U.S. Economy Grows Out of Competing Interests

Government role changed over time to meet challenges

 

The special session of Congress was called by President Roosevelt on March 9, 1933, to deal with the banking crisis. (© AP Images)

By Howard Cincotta
Special Correspondent

This is the fourth article in a series on the U.S. financial system and market regulation.

Washington -- Although Jamestown, Virginia, is celebrated as the first permanent English settlement in America, it was also the name of a company seeking profits from gold and other New World riches. As an investment, however, Jamestown in 1607 was a disaster. Only with the discovery of tobacco did the Virginia colony stabilize itself and begin to grow.

The rise of the United States from a set of scattered colonies to the world's largest economy was neither certain nor smooth, despite abundant resources. But American settlers brought a set of values with them as important as the ax and plow in settling what one religious minister called "a vast and roaring wilderness."

Chief among them were a suspicion of government, a belief in individual freedom and a willingness to take risks -- whether in claiming a piece of frontier land or starting a new commercial enterprise.

The price was an economy that, despite remarkable growth, remained trapped in a boom-and-bust cycle for its first 150 years, as Americans struggled to find a regulatory role for government that would limit excesses of power without stifling investment and innovation.

MONEY WARS

The first debates over the government's economic role pitted Treasury Secretary Alexander Hamilton, who advocated a national bank and strong central government, against Thomas Jefferson, the nation's third president, who idealized a republic of small farmers and limited government and remained suspicious of concentrated economic power.

The bank battle came to a head during the term of Andrew Jackson, the seventh president. Jackson, representing Western interests, vehemently opposed the Second Bank of the United States, and refused to renew its charter in 1836.  (See "U.S. Central Bank Works to Smooth Business Cycle.")

America's westward expansion exacerbated economic differences between the East Coast and American West, especially after the Civil War. Hard-money Eastern industrialists advocated the gold standard and tight credit to prevent inflation, while cash-poor, credit-hungry workers and farmers of the West demanded an increase in the money supply to ease credit and reduce their debts.

In one of the most famous political orations in American history, Democrat William Jennings Bryan in 1896 summed up the accumulated resentments of Western, rural interests toward Eastern industrialists when he declared, "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold!"

Industrialization in the 19th century served to create a single unified American market, principally through the proliferation of railroads, which not only shipped goods but opened up vast tracks of Western lands. America's expansion also was fueled by a continuing series of transformative inventions and innovations, from the steam engine and telegraph to the incandescent light bulb and factory assembly line.

Vast accumulations of private wealth led to the Progressive Movement, the first systematic attempt to regulate business and combat pervasive corruption. The Progressive legacy is a set of regulatory agencies such as the Food and Drug Administration, antitrust laws to prevent corporate monopolies and the federal income tax. (See "U.S. Government Uses Tax Policy to Shape Economy.")

NEW DEAL AND NEW ECONOMY

The decisive shift toward a more regulated free market was a result of the nation's worst economic crisis -- the Great Depression of the 1930s, which saw the gross national product contract by a third and threw a quarter of all workers out of their jobs. Under President Franklin Roosevelt's New Deal, the government's economic role grew significantly through vast public works projects, regulation of financial markets and a public pension fund called Social Security, the nation's first and largest entitlement program. An entitlement program guarantees a certain level of benefits to persons or entities who meet requirements -- such as age or income -- set by law. The New Deal also saw the rise of industrial labor unions.

Following World War II, America experienced decades of sustained prosperity and helped lift economies worldwide through the open exchange rate and financial provisions of the 1944 Bretton Woods Agreement. (See A Timeline of Economics and Trade.)

In more recent years, America has experienced improved productivity related to such factors as globalization, government deregulation and innovation based on computer technologies.

However, the country started the 21st century with a federal budget deficit, which ran to $435 billion in 2006, much of it financed by foreign banks. The main force behind the rise in government spending has been the growth of entitlement programs. As a result, entitlement and other mandatory spending now consume more than 50 percent of the federal budget.

As in the past, the future of the American economy, and its role in the world, will rest on the energy, ingenuity and entrepreneurship of the American people and the government that serves them.

See also "U.S. Central Bank Benefits Self-Regulating Economy."

For more information, see USA Economy in Brief  and An Outline of the U.S. Economy.