The Economic History of the United States of America

Introduction

The United State of America has had a great trend in its economy. There have been depressions and recessions in the economy. 13 small group of farming economies joined in 1776 to form a large United States of America.

This resulted to a huge growth of the United States and it made a quarter of the world’s economy. The growth of the economy received a great boost from the political system, availability of natural resources and agricultural land that was very productive. The citizens had a big impact also since they were very innovative and entrepreneurial.

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This attracted so many people from all over the world to came and settle in the United States and made the human resources available. The arrival of Europeans in the United States led to alteration of the economy since the people had to adopt the European way of life. The American Revolution led to war as the Americans were fighting for their rights and it affected the economy. The American Revolution started from 1775 to 1783.

Economic Trends

The United States of America faced recessions and depressions in its economy that affected the economy of the whole world. War has been one of the major causes of recession in the United States. In 1953, the rate of unemployment was at 5%.

This was caused by the country trying to recover from the war. The unemployment levels went higher year by year and in 1957, it was at 6.2 %. The Federal Reserve used the money supply policy, which reduced the amount of money for businesses to expand, and as a result, there were no new job opportunities created.

In 1961, the level of unemployment reduced by 1% because of president Kennedy’s effort to increase the government expenditure. This came at a time when people had lacked confidence in the government as many banks were running out of money and many of them were closed. The most severe recession was experienced in 1973-75 were the rate of inflation was very high and adversely affected the whole GDP. The Vietnam War and the oil crisis caused this.

The oil embargo announced by the organization of petroleum exporting countries (OPEC) affected the production of goods and services in the U.S (Taylor 2009, p. 45). By this time, much of the world was dependent on oil for everyday life and business function. The prices of oil escalated and it was followed by the lack of sufficient supply and this affected the American economy. The GDP dropped by 3.2 percent and the unemployment rate was very high that it hit 9% with the recession ending in March 1975.

In 1979, the oil prices were sharply increased all over the world due to the Iranian revolution. Izurieta (2003, p. 15) argues that the Iran’s new regime exported the oils in small volumes at very high prices and the supply was not constant. This contributed to businesses operating at high operational cost that they were declared bankrupt in 1982. As a result, many people were left unemployed with unemployment rising 10.8 percent.

During this period, the American Federal Reserve was using a very tight monetary policy in order to control inflation, which had contributed to the high level of unemployment. From 1980, the United State had adopted an economic expansion policy that affected the economy negatively since it raised the level of inflation. Between 1986 and 1989, the Federal Reserve increased the interest rates.

These reduced the amount of cash flowing in the market since the borrowing power of people was affected by that move. In 1990, the price of oil went up again because of Gulf war. In addition, it caused the people to loose confidence with their government.

The debts accumulated, consumer pessimists continued and savings and borrowing habits of the consumers changed (Izurieta 2003, p. 12). This led to another recession in 1990. In 2001 there was approximately of 10% decline in the volume of exports of both goods and services. This recession was also attributed to the sudden drop in housing investment, which was caused by the rise in the interest rates.

The rates on mortgage rose from 6.75 % in 1998 to 8.5% in April 2000. This period is when the federal government was using the contractionary monetary policy, which increased its fund from 4.75 to 6.50 percent. The fall of dot-com bubble stocks and the cases of accounting scandal and fraud at Enron and other big companies was also one of the many causes of this recession (Izurieta 2003, p. 110).

The great depression

This was the biggest economic depression felt in the United States of America. Producers and sellers realized that their commodities were not bought and they decided to reduce their levels of production and all this resulted to the fall of aggregate demand. The reduction of the production rate was being caused by the invention of American contractionary monetary policy. The policy had an aim of limiting the stock market speculation.

The gold standard system spread the depression all over the world. High stock prices in 1928 and 1929 forced the Federal Reserve to increase the interest rates to control the prices. The construction and the automobile sector reduced spending due to the increase of the interest rates. Many investors in 1930 lost confidence in the commercial banks and they started demanding their money that they had deposited (Cooper 2008, p.7).

This forced banks to liquidate the loans with an aim of raising money to pay their customers. This whole process lasted for 2 years and caused a fifth of the banks to close. According to some economists, lack of confidence by the investors was caused by bad U.S. economic policies coupled with the debts during the 1920. They also argued that the Federal Reserve reduced the money supply, which was in favor of the gold standard policy.

Franklin Delano Roosevelt who was the president at this moment relied much on the policies made by the eclectic group of advisers and refused to take ideas from an economist John Maynard Keynes who had proposed deficit spending to reduce the level of inflation. Another economist by the name Robert whales also criticized the need deal policy that was introduced by the eclectic group of advisors. He argued that the new deal programs increased the period of depression although Erick Rauchway differed with him.

Tight policies of the Federal Reserve were to blame for them ensuring that there was less money supply in the economy, which boosted the level of unemployment. An economist Jonathan Catalan blamed the government for failing to correct the action against the expansion of the level of money supply until it affected the economy largely (Cooper 2008, p. 28).

During the time of the depression, all the performance determinants declined greatly. They included the production level, tax revenues and profits and wages levels among others. The reduction of all this factors resulted to a serious financial crises in the whole world. Some of these financial crises were caused by the Federal Reserve policies.

Mr. Mariner Eccles who was the chair of the Federal Reserve in 1939 introduced a policy that would have introduced when the crisis was over but he never waited for that. He failed to understand that the policy that he introduced was supposed to be for a stable economy like the way the American economy is like right now. He needed to increase the level of money supply to create employment opportunities and stimulate investment.

The government should have also increased there level of spending in the economy and this would have increased the job opportunities. The policy that he introduced that needed the commercial banks to keep 50% only of all deposit and to give the rest 50% to the federal resulted to the crises. This policy reduced the level of borrowing and consequently the banks raised the interest rates and reduced the economy (Krugman 2009, p. 8).

The economic crises were also caused by the poor performance of large companies especially those who had invested in the internet industry. Later, the industry started to face instabilities, which led to the firms that had invested in them to collapse.

The United States internal policies were the major cause of the financial crises. Today, president Barrack Obama the president of the United States of America has formed financial and microeconomic policies that are aimed at reducing the financial crises all over the world.

The microeconomic policies involve reforming the health sector, making the transition to greener economy, increasing labor and the bargaining power among others. The other policies are the financial which includes, transforming financial firm incentive structure that induce excessive risk taking, extend regulatory oversight to the shadow banking system, restrict or eliminate off balance sheet vehicles (Krugman 2009, p. 23).

To implement a financial pre-cautionary principle is among the financial policies that president Obama’s administration has prepared. This will be implemented for commodities and services to check whether they should in market.

All these reforms are to reduce the excessive debt growth in the boom period. The administration also wants to introduce a policy that restricts the growth of debt through cyclical capital requirement. It will control the expansion rate of financial assets.

The move by the president of the United States to introduce those policies is to deal with the financial problems experienced in the world. All these economic crises have strengthened the radical forces to implementation of economic measures that will lead to long term and sustainable growth (Taylor 2009, p. 144). The united state of America follows a capitalist economic system that was first put forward by Adam Smith.

Through the system, the free hand that implies the forces of demand and supply control the market and are necessary for the attainment of market equilibrium. Prices and quantities of products that are sold in the U.S economy are determined by the demand and supply of similar goods within the market. In addition to the capitalist system, the U.S. economy utilizes the Keynesian theory and economics that relies on increased savings and investments in order to create wealth.

During the great depression, many investors were forced to hoard their money and therefore went against the theory. This is what made the economy to stand still according to this philosopher. During that period of depression, he urged the government to increase its spending or increase the money supply in order to hold up the economy.

Today his theory still holds since he warns against too much savings and the habit of under spending because these habits affects the process of distribution of wealth. The Federal Reserve should promote the monetary policy in order to reduce the level of inflation.

This policy seeks to promote effectively the goals of maximum sustainable output growth and employment and set moderate interest rates. They should also form policies to deal with financial disruption and prevent them from affecting other non-financial sectors and finally they should stabilize the exchange rate of the dollar to reduce its effect on the international markets (Federal Reserve 2011, p. 7).

Conclusion

The United States has faced by many economic phases as the rest of the world. Introduction of measures to deal with the economic crises will affect the whole world as has already been experienced because of the high oil prices. The biggest effect of the depression was on the level of unemployment.

This is because it affected the businesses and the production firms there fore reducing the employment opportunities. The banks raising the interest rates also resulted to these. The level of unemployment rose, purchasing and consumer power dropped and the housing prices declined. The implementation of the economic regulation policies will reduce the impact these factors will have on the economy of the United States.

List of References

Cooper, G 2008, The origins of financial crisis: Central Banks, Credit bubbles, and the efficient market fallacy, Vintage Publishing, New York.

Federal Reserve, 2011, ‘Monetary Policy and the Economy’, viewed 15 December 2011,

Izurieta, A, 2003, ‘Economic slowdown in the U.S: Rehabilitation of fiscal policy and the case for a co-ordinated global reflation’, viewed 15 December 2011, .

Krugman, M 2009, ‘The great recession versus the great depression’, New York Times, viewed 15 December 2011, .

Taylor D 2009, Soul of a people: The WPA writers’ project uncovers depression America, McGraw Hill, New York.

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