The Climax of Capitalism

The U.S. Economy in the Twentieth Century

Tom Kemp

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317870739
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

How did the United States become the twentieth century's dominant economy? What is special about America and the American way of capitalism, that favoured such a rapid climb to wealth and power? And, as the old postwar certainties begin to crumble, is the climax of American capitalism already over? These are the themes addressed in this engrossing book, which gives a chronological, analytical account of the American economy from the late nineteenth century to the end of the Reagan era and beyond.

Chapter 1
Setting the stage

During the first half of the twentieth century, the United States became the dominant world power, assuming a role analogous to that played by Great Britain in the previous century. This predominance rested upon a mighty industrial base built up in a country of immense size and bountiful natural resources. At the time of its foundation as an independent country, the United States had consisted of a collection of European colonies stretched out along the eastern seaboard of an as yet unexplored continent, dependent upon agriculture for its existence. In little more than a century it had been transformed into an industrial giant, soon to enjoy a world leadership in practically every field.

The process of colonization and settlement going back to the seventeenth century had created a society of a unique kind. It was the largest and most successful of those countries classified as of recent European settlement, a transplant of European institutions, techniques, customs and practices to a virtual wilderness. Here, in a new physical and increasingly different social environment, a characteristically 'Americans' society came into existence.

Territory and resources were appropriated by the newcomers as though by a God-given right, regardless of the claims of the existing inhabitants, many of whom were to be killed or humiliated as settlement proceeded. In this environment of virgin land, untramelled by feudal vestiges or inhibiting traditions, the newcomers and their descendants could establish a more purely capitalist society than the one left behind in the Old World, still shaped by its feudal past. Institutional forms and legal codes could be shaped in accordance with the imperatives of individual acquisition and accumulation, guaranteeing property rights and offering greater scope for the operation of market forces. People were free to practise the religion of their choice or none at all.

Beginning at Independence (the Declaration of Independence and Adam Smith's Wealth of Nations - fountain-head of the doctrine of the free market which has been so important in American history, both date from 1776) as a country of small farmers, largely self-sufficient, with a wealthier stratum of merchants and plantation slave-owners, its transformation over the next century or so into a mighty industrial giant was one of the most remarkable, and fateful, that history has to offer.

In the decades following the Civil War (1861-5), a modest primary-producing and exporting country became the leading industrial power, out-stripping the European powers and assuming world leadership after the First World War. The intervention of the United States in the two World Wars, decisively turning the scales in both of them, was both cause and consequence of the rise to world dominance. At that point it was easy to assume that the American century had come, and Europeans were warned to take up 'the American Challenge' by the French political figure Jean-Jacques Servan-Schreiber (Eng. trans. 1968) if they did not want to be overwhelmed by the transatlantic giant. Almost before the message of this one-time best-selling and now heavily dated book could sink in, American hegemony itself appeared to be under challenge, not from America's main rival and adversary, the Soviet Union, but from changes in the world economy which had undermined it, notably the resurgence of the war-scarred capitalist countries and the rise of 'newly industrializing countries'. By the 1980s the so-called 'decline' of the United States was at the centre of fashionable debate.

This book will attempt to indicate what were the forces which made the United States the world's leading economic power, and what factors, domestic or foreign, eventually undermined that position. After examining the long-term factors in America's ascent, subsequent chapters will look back at recent economic history, from the 1920s onwards, seeking the historical roots of both the strengths and weaknesses of the American economy today.

The rise of America's economic power rested upon the ability of its entrepreneurs to develop the most advanced technology and to organize large-scale production in a scientific way. Through most of the twentieth century achievements in production and in raising the productivity of labour outstripped those of any other country. American techniques of production, business organization and management became models for even the most advanced industrial countries, and continued to be such for some time after the Second World War, when American influence on business practice internationally reached its highest point.

To understand why this was so, it is necessary to cast a backward glance at the specific conditions under which American industrialization took place. Europeans who colonized the continent of North America came from that part of the world which had already developed the most advanced techniques and forms of organization, as their arrival, invasion and successful settlement of the colonies suggests. There was little or no basis, in the colonial environment, for the transplanting from Europe of feudal forms of land tenure or pre-capitalist institutions. The high ratio of land to labour in colonial times, which made it possible for almost all free men to acquire some property, made it difficult for anything like a landed nobility to establish itself and impose serfdom. The nearest form, for white people, indentured labour, lasted for only a fixed term of years, after which the servant might be granted a plot of land and become independent of wage-labour. The general scarcity of labour, indicated by the importation of indentured servants, was overcome by the large landowners, in the regions of plantation agriculture, by the importation of black slaves, mere chattels, whose labour made it possible to produce the great export staples like tobacco, indigo, sugar and later, above all, cotton, upon which the wealth of early America was based. For decades, the 'peculiar institution' of the South co-existed with free labour in the North; a contradiction between two divergent societies resulted, only to be resolved in bloody civil war which cost perhaps 600,000 lives.

Material improvement — a higher standard of living in their lifetime - was a compelling motive of the early settlers, their descendants and successors. It remained the major driving force in American society. Conditions were extremely favourable for the eventual realization of such hopes, not easily, but through hardship and hard work. The gospel of hard work as the means to material success had its religious counterpart in the assumption that success so achieved had divine approval. In the new land most families made their living by tilling the soil. The virtues of the family farm became part of American mythology, and its praises are still sung, though it has all but disappeared as a viable economic unit. Even by the early nineteenth century the goal of most farmers was not self-sufficiency but the production of a surplus to sell in the market. Many saw their land as a speculation, and were ready to sell-up and move on to where new lands at low price beckoned. Pre-industrial America was a land of small commodity producers, with the ubiquitous merchant playing a linking role. It was already quite different from Europe in its social relations, mainly because of the pervasive forces of the market, and the emphasis on material advancement and success. The geographical mobility of many Americans contrasted with the close ties to their place of birth of European peasants.

Colonization and Growth

During the late seventeenth and the eighteenth centuries, the American colonies became staple producers and exporters geared to the markets of industrializing Britain and other parts of Europe. Long after Independence, this 'colonial' relationship persisted. The United States exported primary products and imported manufactured goods. It continued to draw upon Europe for supplies of labour and it borrowed heavily, mainly in the London capital market.

The ability to produce a surplus for export depended upon the high ratio of resources to population and the response of producers to pecuniary incentives. As long as slavery endured, a large surplus could be exacted from the labour of the slaves. Part of the latter found its way into the conspicuous consumption for which the slave-owners were notorious. Even so, part of that surplus, together with that generated by Northern agriculture, found its way into productive investment, directly or indirectly. Farmers, who commercialized as much as possible of their output, appeared in the market as purchasers, both of agricultural inputs (such as tools or seeds) and of consumer goods; local and regional markets sprang up. While the more sophisticated manufactured goods might still be imported, the expansion of the domestic market offered opportunities for local production of household articles and agricultural implements by specialized craftsmen and artisans. In time the market grew sufficiently large to encourage the setting up of larger units of production.

Since most sections of the population enjoyed a relatively high per capita income by contemporary European standards, and numbers grew at a steady rate, the market expanded and, with it, the division of labour. A country of vast distances, the internal market at this stage was bound to be fragmented, owing to the high costs of transport. Transport improvements, which lowered the cost of hauling freight, became a key to growth, making possible greater regional specialization. By the late eighteenth and early nineteenth century, industry was concentrating in the north-east; farmers were moving westward, opening up new lands for cereal production both for the domestic market and for export. With the invention of Eh Whitney's cotton gin (1798) making it possible to separate the cotton fibre from the seed with a considerable economy of labour-time, a plantation slave-economy producing cotton for export was riveted upon the South.

At this stage, the main form of capital was employed in buying and selling goods, in holding stocks and goods in process. Capital took a mainly mercantile form; industry employed little fixed capital and was still mainly in the hands of small artisans and craftsmen. Larger plants only appeared as entrepreneurs began to set up factories, mainly in the spinning and weaving of textiles, on the pattern of those which were leading the way in the industrialization of Britain. When that country was at war with France (1793-1815) and was no longer able to export manufactures to the United States on the same scale as before, enterprising New England capitalists pursued a policy of 'import-substitution', setting up factories of their own using the abundant water-power of the region and the daughters of farmers as their main source of labour supply. Other forms of production, such as flour-milling and saw-milling, also became more concentrated as the market widened, but they did not require a technological breakthrough or need new sources of power; fast-running streams or rivers would suffice. The metal industries continued to operate on a small scale with traditional methods, using charcoal.

Until the mid-nineteenth century the transplant of new technologies, especially in textiles, then in the metal-producing and using industries, took place steadily, though unevenly, but without a spectacular breakthrough. However, American conditions were particularly hospitable to techniques which promised to economise on the relatively scarce factor, labour, and give greater economic value to the abundant factors, land and natural resources. New resources were revealed by the westward movement, especially anthracite coal and petroleum. Borrowers at first, American innovators began to adapt and improve imported technology and then develop their own in the light of the relative scarcity of labour and capital and the abundance of land and natural resources in America and the nature of demand. Thus wood-working machines were labour-saving but appeared to use wood wastefully, but it was cheap and plentiful. There was a growing market for cheap, strong, serviceable and standardized articles of everyday use in the household or on the farm (and most families still cultivated the land). At the san e time, there was no mass movement off the land. Hard labouring jobs might be filled by new immigrants and, as mentioned, the early New England mills looked to farm families for their labour supply. Labour, especially for more skilled work, tended to be relatively scarce. Many Americans possessed industrial skills, were better educated than their European counterparts and accustomed to turning their hand to whatever task came their way. But they might be more interested in working for themselves than for a boss and would expect a relatively high wage. The labour market was different from that in Europe and encouraged a search for labour-saving methods.

At this time (from the 1830s) new industries grew out of handicraft production, by splitting up complicated processes into their component parts, reducing each one, as far as possible, to a repetitive operation which could be performed by an unskilled worker or a machine. Production on a larger scale, with a more complex division of labour or the use of machinery, required a bigger capital investment. Large outlays of this kind would not be undertaken unless the entrepreneur expected to be able to sell a larger volume of commodities. It was the growth of the internal market for cheap, standardized goods which encouraged entrepreneurs to take the risk of investing in new techniques and producing on a larger scale. The heavier fixed costs could be spread over a larger volume of output, thus realizing economies of scale.

Confronted with particularly favourable market conditions, American innovators grasped the logic of the machineprocess, taking it even further than the British inventors, whose work they at first emulated. An important step was the development of tools which could work metals, as well as wood, to higher degrees of accuracy and which could be used to make machines, in turn able to produce the finished consumer goods. While the handicraftsman had turned out an individual product, using a hand-guided tool, counting on the co-ordination of eye and muscle attained with practice, the machine-tool was able to produce standardized parts which were interchangeable. The machine-made product was not a distinct and individual creation but one of a series of identical articles, reproduceable to order. The interchangeability of machine-turned parts had the great advantage that it was possible to replace from stock any part which proved defective or wore out. Each complete article, whether a gun or a plough, would also be one of a series made up of these interchangeable parts. The power-driven machine tool thus made possible standardization and interchangeability of the parts, the basis of modern large-scale production.

Conditions in the United States, notably the existence of a large, uniform market for articles of everyday use, led to the adoption of these methods earlier than in Europe. Already, in 1851, at the Great Exhibition held at the Crystal Palace in London, American exhibits attracted the attention of foreign, especially British, observers. The British government sent a commission to the United States to study on the spot what became known as 'the American System of Manufactures'. It was not always clear that what was specifically new in American production methods arose from particular conditions. In any case, from about this time American technology began to break new ground and move into the vanguard, a harbinger of the rapid industrialization of the last quarter of the nineteenth century which was to transform the United States into an industrial giant. Interchangeability and standardization of parts began with handguns (one of the key contributors to this development being Eli Whitney, inventor of the cotton gin). They rapidly spread to other branches of industry, such as watches and clocks, agricultural machinery, wherever moving parts were involved. Use of these methods undoubtedly assisted American industry to occupy a leading position in new types of manufacture such as the sewing machine, the typewriter and later the automobile.

However impressive such industrial advances were, they took place, at first, in what was still a small sector of an economy dominated by primary production. In 1840 manufacturing accounted for only ten per cent of Gross National Product, reaching a modest seventeen per cent on the eve of the Civil War. But it was the most dynamic sector and already the dominant one in some areas, particularly in the North East.

Meanwhile, improvements in transport were knitting together the older settled regions into a single, more integrated market and pushing settlement further west across the continent. Exports continued to be dominated by the products of the Southern plantation system and the cereal-growing West. On the eve of the Civil War, the United States could be characterized as a prosperous country of commercial agriculture and merchant capitalism; industry was still largely organized on the older handicraft lines, but there was a significant, and growing, part of industry which was highly capitalized, technologically advanced and poised to take the lead in the world market. As a primary producer and a debtor country the United States was still dependent upon Europe. The inflow of capital, like that of labour, was vital for continued expansion, leaving locally generated capital free to exploit the possibilities of what was becoming a continental economy.

The Civil War and Its Aftermath

That the United States was already a rich country, producing a large surplus over subsistence needs, was established lugubriously by the mass destruction and slaughter of the Civil War. A 'modern' large-scale war, though fought mainly between infantrymen, it required an enormous mobilization of manpower and resources on both sides. It proved to be an inordinately costly method of preserving the Union and abolishing slavery, its only positive results.

Thanks to the intensive use of labour in the gang system and the buoyant market for cotton (largely from Britain), the slave economy remained highly profitable in the ante-bellum period. Slavery was not collapsing under the weight of its own contradictions, nor were the slave-owners in any mood to be bought off by some kind of compensated emancipation. Force was perhaps the only way in which 'the peculiar institution' could have been ended. On the other hand, growing opposition to slavery could have been expected from both workers and employers in the North; nor should the possibility of slave strikes or revolts on a growing scale be ruled out.

The Civil War resulted in the loss of over 600,000 lives, mostly young men in their most productive years, and it diverted to destructive purposes resources which might otherwise have been used productively, to raise incomes and promote growth. It left scars which proved difficult to heal. It held back the Southern economy for decades; although it freed the black masses from slavery, it left them landless, poor, segregated and exploited. Most freed slaves continued to till the land and grow cotton, unable to extricate themselves from unequal contracts and crop liens, which effectively tied them to the land with little hope of improvement.

The outcome of the Civil War meant that the future policy of the United States would be determined by the interests of Northern business. This was reflected in subsequent policies concerning the disposal of public lands, tariff protection, railways, banking and the currency. The destruction of property and wealth in the South, as well as the break-up of the planter economy, meant stagnation in that region for decades to come. After the war, the industrializing economy of the North showed great recuperative powers. While the war had slowed economic growth, especially in cotton textiles, some industries had been stimulated by it. The view that the war acted as a forcing house for more rapid industrialization, however, has not stood up to statistical verification. Military needs did not place the same demands on heavy industry or encourage advances in technology as has been the case with the wars of the twentieth century. Nevertheless, the Civil War may have assisted the accumulation and concentration of capital, enabling Northern business to stride forward more confidently now that some major policy issues had been decided in its favour.

The decades after the Civil War saw an acceleration of innovative change and structural transformation which laid the basis for the establishment of Ame...