Economic Development

Economic Development. Economists define economic development as a sustained increase in per‐capita income. While this definition is a good starting point, historians generally conceive economic development as a broader set of social and political changes. In the context of U.S. history, those changes include the settlement of a capacious frontier, the growth of large cities, a vast influx of immigrants, and the rapid spread of new technology. The complexity of these changes notwithstanding, the course of U.S. development can be traced through three major periods: the extensive growth of the colonial and revolutionary periods; the expansion of commerce during the first half of the nineteenth century; and the emergence of “managerial capitalism” after the Civil War.

The Colonial and Revolutionary Periods

. The economy of colonial America grew rapidly because of sustained population growth and profitable cultivation of staple crops. Massive free and unfree immigration from Europe and Africa—coupled with a moderate climate, relatively high nutritional levels, and high fertility rates—resulted in extraordinarily rapid population growth. Between 1650 and 1770, the population of Britain's mainland North American colonies increased from 55,000 to more than 2.2 million. Most colonists participated in a vibrant agricultural economy. High prices for wheat and tobacco—British North America's two main staples—encouraged the particularly rapid settlement of the middle and southern colonies in the eighteenth century. White colonists in the slave South—benefiting from slave labor and high staple prices—ranked as the wealthiest of the colonists.

Rapid population growth produced substantial economic development. Because no sweeping technological or organizational advances dramatically stimulated productivity, per‐capita income grew quite modestly by modern standards, increasing anywhere from .3 to .6 percent per year. Yet colonists built an increasingly sophisticated commercial infrastructure that resulted in the growth of towns and cities. Such development was particularly important in New England and the Middle Colonies, where cities became major market centers. By 1770 such cities as Boston, New York, and Philadelphia provided an impressive array of mercantile services that induced future economic growth.

Government policy, both in Britain and the colonies, also aided colonial development. Unlike France or Spain, British authorities did not seek to regulate overseas migration, thus abetting the population explosion in the North American colonies. British mercantilist policies, designed to further the interests of the imperial center, sometimes impeded colonial trade with other nations. Colonists, however, successfully evaded the most onerous regulations, while the British mercantile system enabled American merchants to export grains, lumber, livestock, and other goods. The Revolutionary War, in fact, initially had devastating economic consequences because American merchants lost many of the trading privileges they had enjoyed under the British empire.

Expansion of Commerce between the Revolution and the Civil War

. Most export agriculture in the colonial and revolutionary period was confined to areas with access to water transportation. Transporting bulky crops over the nation's rutted and muddy roads was prohibitively expensive. In the period 1800–1820, private turnpike companies—which improved roads in order to collect tolls—alleviated the worst problems of overland transport, but grains and other bulky commodities remained too expensive to ship over roads. Hence proponents of economic development avidly improved rivers and built canals to extend the nation's system of waterways. The Erie Canal, completed in 1825, was by far the most important of these improvements. Built through the gently rolling landscape of upstate New York, the Erie Canal connected the Great Lakes to the Hudson River. It transformed such cities as Buffalo, Rochester, and Syracuse into major transport, mercantile, and manufacturing hubs. Canal systems in Ohio and other Midwestern states extended the reach of the Erie system, providing farmers throughout the Middle West with an all‐water connection to New York City. The steamboat, meanwhile, facilitated trade on the Mississippi and Ohio River systems, providing yet another avenue of commerce.

Steam power soon had an even larger impact when applied to overland carriage. Areas in which water transportation was either unavailable or prohibitively expensive turned to the railroad. First built in the late 1820s, railroads rapidly spread across the county. By 1860, Americans had built approximately 30,000 miles of track, with four separate roads penetrating the Appalachian Mountain barrier. Railroads not only accelerated the growth of cities on the eastern seaboard, but also transformed Pittsburgh, Chicago, and other Midwestern cities into major marketing and manufacturing centers.

Although historians have discarded the view that the railroad single‐handedly accounted for American industrialization, it nevertheless contributed to the dramatic expansion of commerce in everyday life. In the North and Midwest, the expansion of the railroad network created a self‐reinforcing cycle of growth. As transportation improved, farmers produced more grains, dairy products, and other produce for urban centers. With more cash to spend on consumer goods, farm families demanded textiles, shoes, furniture, and other manufactured products. Manufacturers and merchants, responding to the larger agrarian market, increased their output and improved productivity. Firms producing such goods as ready‐made apparel, hats and caps, and boots and shoes, for example, increased productivity through specialization and greater division of labor. Incremental technological advances—usually the result of tinkering by rather ordinary mechanics—further increased manufacturing productivity.

The South lagged far behind in inventive activity and other measures of economic development. Its slave‐based economy, to be sure, produced enormous profits for many planters and farmers. The southern economy did especially well in the 1850s, when the price of cotton, tobacco, and other staples soared. Yet in almost every other measure of development—urbanization rates, inventive activity, manufacturing output, population growth—the North far outstripped the South. As the Civil War approached, the regional disparities grew. In 1860, the value of manufactured goods produced in New York City alone exceeded the combined production of the eleven southern states that would form the Confederacy. Underlying the South's failure was a lack of adequate demand to spur industrialization. Plantation slavery restrained population growth among free farmers and an unequal distribution of rural income undermined the earnings and consumption habits of farm families that had provided northern entrepreneurs with lucrative markets. However profitable to southern planters, slavery seriously impeded southern industrial development.

The limitations of southern development notwithstanding, the U.S. economy grew impressively between 1800 and 1860. Historians debate to what extent federal and state government action contributed to this remarkable economic expansion. State governments frequently intervened in the economy in the early nineteenth century, especially when, as in New York and Pennsylvania, they operated their own canal systems. Although New York's Erie Canal succeeded, most other state‐owned canals failed. State and federal governments provided engineering expertise, land grants, and other subsidies to the railroads, but private investors supplied most of the capital. The most important government intervention was enforcing a stable set of property rights (including a patent system) that encouraged economic expansion and technological innovation. State governments made it easier for entrepreneurs to obtain corporate charters for banks, factories, and other enterprises, while the federal courts protected interstate commerce and used law to validate corporate charters and contracts. With a strong legal foundation in place, national markets and national enterprises came to dominate the economy.

Managerial Capitalism and the Modern Economy

. The post‐Civil War expansion of the railroad network—including the construction of the first transcontinental lines—enabled entrepreneurs to establish national corporations. While a few large firms had flourished earlier during the market revolution, especially in the New England textile industry, these firms paled compared to the corporate giants of the late nineteenth and early twentieth century. By 1910, Standard Oil, U.S. Steel, Armour and Co., and the American Tobacco Company were among the firms with assets in excess of $200 million. Another round of technological change soon added such newer businesses as Ford Motor Company and General Motors to the list of industrial giants. These enterprises tended to be capital intensive, using their large size to forge substantial economies of scale. Technological advances became even more important. Many large firms organized research divisions and departments that institutionalized technological change.

Borrowing from the experience of the railroads, these large industrial firms also developed complex administrative bureaucracies heavily stocked with middle managers and upper‐echelon executives. Entrepreneurs such as John D. Rockefeller and Andrew Carnegie used these new administrative forms to ascertain precise production costs, enabling them to identify and then to eliminate expensive bottlenecks. Rockefeller's Standard Oil Company, in particular, ruthlessly cut production costs, enabling the company to buy out or destroy less efficient competitors. By 1890, Standard Oil—which owned 20,000 oil wells, 4,000 miles of pipeline, and 5,000 specialty railroad cars—controlled more than 90 percent of the American oil and kerosene market. Whereas large corporations tended to dominate industries with relatively homogenous output (oil, steel, and tobacco), smaller firms thrived in sectors that produced specialty goods, ranging from complex machinery to such consumer goods as furniture. By the early twentieth century, America's combination of large and small firms encouraged the birth of new industries, including automobiles and electrical manufacturing.

Mass production made the marketing and distribution of consumer goods extraordinarily important. To insure a constant demand for their products, businesses invested heavily in advertising, first in print publications, later on radio and television. Innovative retailers devised new ways of selling both basic necessities and luxury goods. Department stores, fashionable retail districts, and, eventually, supermarkets as well as shopping centers and malls indelibly shaped the American landscape. By the early twentieth century, a number of firms expanded the scale of consumer borrowing (especially through installment plans) that allowed a broad range of families to purchase automobiles and other consumer durables.

By 1900, the United States possessed the basic elements of a developed economy: growing per capita income, rapidly evolving technologies, increasingly efficient industrial producers, and sophisticated marketing and distribution channels. Although certain regions of the country—most notably Appalachia and other parts of the South—continued to lag, rapid economic development made the United States the world's largest economy for much of the twentieth century and laid the material foundations for what publisher Henry Luce called “The American Century.”

Because economic development is so complicated, scholars continue to debate the ultimate source of U.S. success. Some stress the availability of such abundant natural resources as fertile soils and rich supplies of iron, coal, and oil. Others underscore the emergence of a national, integrated market that encompassed most of North America. While political and geographic barriers hindered development elsewhere, these scholars argue, U.S. businesses grew in tandem with an expanding home market. Finally, many scholars have emphasized the importance of distinctive American cultural and political attitudes, including a devotion to private property and free enterprise, and a corresponding suspicion of economic regulation that might hinder business success.

Despite widespread support of economic development, many Americans have nevertheless feared that the growing power of big business might subvert democracy. These fears, coupled with deep swings in the business cycle, have created important political movements, especially in the Populist, Progressive and New Deal Eras, that raised important questions about economic development. Should the federal government encourage certain industries with tariffs and other subsidies? Should state and federal governments dissolve or regulate corporations that threaten to become monopolies? How should government mediate conflicts among labor, business, and consumers? What kinds and levels of taxation best encourage economic development while also promoting other social goods? These and similar questions relating to economic development remained divisive as the twentieth century ended.

The advent of the desktop computer in the 1980s and the Internet and World Wide Web in the 1990s opened a new era of U.S. economic development. The “information age” also exemplified many of the same characteristics of earlier changes, including the rapid adaptation of new technologies; a complex mix of both large corporation (including giants such as Microsoft and Intel) and smaller, more flexible firms; and attitudes and regulations generally favorable to free enterprise and hostile to government regulation. Yet despite these links to the past, the new economy also raised new questions. Would the rapid transmission of information make global markets the driving force of continued growth? Would the new information technologies transform consumer culture? How would new technologies affect the managerial structure of “old economy” stalwarts such as the steel, automotive, and chemical industries? While these issues remained unresolved, the rapid emergence of “new economy” industries did once again illustrate the self‐reinforcing nature of economic development. The earlier success of the U.S. economy created deep pools of capital, high levels of per‐capita income, and a strong commitment to research and development that allowed new enterprises to flourish. Clearly the history of economic development remains unfinished, as it continues to influence society, politics, and culture.
See also Antitrust Legislation; Canals and Waterways; Charles River Bridge v. Warren Bridge; Computers; Cotton Industry; Ford, Henry; Foreign Trade, U.S.; Global Economy, America and the; Iron and Steel Industry; Labor Markets; Laissez‐faire; Multinational Enterprises; Office Technology; Patent and Copyright Law; Research Laboratories, Industrial; Roads and Turnpikes, Early; Stock Market; Tobacco Industry.

Bibliography

George Rogers Taylor , The Transportation Revolution, 1815–1860, 1951.
Alfred D. Chandler , The Visible Hand: The Managerial Revolution in American Business, 1977.
Diane Lindstrom , Economic Development in the Philadelphia Region, 1810–1850, 1978.
John J. McCusker and and Russell R. Menard , The Economy of British America, 1607–1789, 1985.
William Robert Fogel , Without Consent or Contract: The Rise and Fall of American Slavery, 1989.
Stuart Bruchey , Enterprise: The Dynamic Economy of a Free People, 1990.
Stanley L. Engerman and and Robert E. Gallman , The Cambridge Economic History of the United States, Volume I: The Colonial Period, 1996.
Philip Scranton , Endless Novelty: Specialty Production and American Industrialization, 1865–1925, 1997.
Edward J. Balleisen , Navigating Failure: Bankruptcy and Commercial Society in Antebellum America, 2001.

John Majewski