An Empire of Wealth: A Study of the Economic History of the United States
History isn't just written by the victors. It's also written from the perspective of politics. Here's what you should know about the economic history of the United States.
I love history.
In elementary school, I convinced my 5th grade teacher to let me spend my recess in the library. I read every book I could find – including the encyclopedia (remember those?) – on the American Revolution.
When I was done, I forced my teacher to let me share my findings with the class (thanks Mr. B).
In high school, I wanted to take an AP class that my school didn’t offer – AP European History. I asked my homeroom teacher if I could borrow her textbook to prepare for the test. I read it and somehow managed to earn myself a few college credits in the process.
My love for history didn’t abate once I got to college. During my sophomore year I decided to add it as my third major, even though I didn’t really need it and I knew history majors don’t exactly land high-paying jobs after graduation.
Despite my obsession with history, I have quite a myopic view of the past. You probably do too and you might not even realize it.
Almost everything that’s taught in school is filtered through one of two lenses: political and military history. I vividly remember learning about Henry Clay, the Progressive Era, and FDR’s New Deal in high school. And I studied World War II and Vietnam at length in college.
But I never once considered looking at the world through an economic lens. Or at least how economic factors shaped some of the most important events in American history.
Over the last decade or so, I became interested in personal finance, in part, because I hated my career and wanted to find a way out. I followed well-known financial influencers like Dave Ramsey and took what they had to say to heart.
But then I started writing my own content working for influencers in the personal finance space. I realized everything I thought I knew about the money was built on a lie. I wasn’t in debt because I ate too many avocado toasts.
I was in debt because we live in an economic system that profits off of debt. Some of my debt is a function of my own ignorance and bad choices. But part of it was by design too.
That prompted me to dig deeper. I wanted to learn more about the economic and financial history that created the world we live in today. Something I honestly had never studied before and didn’t really know much about.
An Empire of Wealth: The Epic History of American Economic Power is a historical account of the United States from its founding to its emergence as the world’s lone super power at the end of the Cold War. The book analyzes how geography, technology, and the evolution of Wall Street put America on a trajectory to become an economic powerhouse.
This essay will highlight five of my key takeaways from the book. It will show how the American economy evolved over time and why we are more connected to the past than we might realize. To navigate an uncertain future we first have to understand where we came from, including understanding the evolution of our economy. This book helps do just that.
The American colonies were established as outposts of British companies – not the British Crown. The entrepreneurial founding of America made property ownership more accessible, shaping how new American institutions formed.
In our current political context it’s fashionable to interpret history through the lens of imperialism. Many people think the Americas were founded with the explicit intent of exploiting the native inhabitants who already lived here. While that certainly did happen to some extent, that wasn’t why the Americas were founded.
Prior to 1453, goods traveled between Europe and Asia through Christian Constantinople. When the Turks conquered the city, they put an end to eurasian trade as it had existed. Moving forward goods would pass through Muslim controlled territory and incur a tax in the process.
The idea of surrendering financial resources to a Muslim power that was already on Europe’s doorstep was unacceptable to the Catholic Church and the European monarchs that pledged loyalty to it. This disdain for the Ottoman Turks was the same for early capitalist merchants. A tax would increase the cost of moving goods across the continent, eating away at their profits.
Not too long after the fall of Constantinople, independent trading companies with the support of European monarchs began looking for new, maritime routes to Asia. Columbus’s discovery of the Americas was a happy accident as he sailed west looking for the Indies.
In the beginning of An Empire of Wealth, author John Gordon Steele makes a bold claim:
The colony at Jamestown was not founded by the English state; it was founded by a profit-seeking corporation. (9)
This assertion suggests America wasn’t founded the way we were taught about America’s founding in school.
America’s first colony was founded in Jamestown by the Virginia Company, a joint-stock company based in London. The first settlers weren’t British imperialists who were eager to lay claim to new territory for the British Crown, they were “dispossessed peasants and unemployed cloth workers,” people who had been reduced to poverty following the collapse of feudalism.
In 1616, the Virginia Company gave colonists the opportunity to own land, something that was impossible for peasants back home in England. Steele writes:
In an age when agriculture was the foundation of all national economies, wealth was measured less in pounds sterling than in acres. In land-starved Europe, two hundred acres of prime agricultural land made one rich. (16)
The economics of land ownership – and the cultivation of that land – shaped the trajectory of how the United States would evolve over the next two centuries. The southern colonies leveraged fertile land to grow cash crops, while the north – lacking arable land – industrialized. After the American Revolution, the invention of a new device – the cotton gin – made cotton production the south’s most profitable source of revenue. Without industry, the south was dependent on human labor – slave labor – to power its economy.
Industrialists in the north built companies that manufactured goods and traded those goods with Europe (and the south). Massive infrastructure projects like the Erie Canal made it possible to produce products from within the interior of the country and get them to market. Because northerners couldn't make a living from cultivating their land, land ownership wasn’t as important to the northern economy as it was in the south. This is why when new territories were added, people took a leap of faith to settle the frontier and claim a plot of land for themselves.
In both regions, risk-taking individuals had equity in their own success. That’s why the founding of America centers around the idea that peasants could own things – land, property, and businesses – and the importance of protecting ownership rights. The economy that emerged during the colonial period was nothing like anything that had been seen in Europe before.
For the first time in history, average people could own things, not anointed monarchs or a coterie of aristocrats who were bequeathed ownership by virtue of their birth. The average person could come to America and make something for themselves.
The Civil War broke out over slavery. But the Panic of 1857 may have actually been a catalyst for secession.
In a typical American history class you’re taught that the Civil War officially started with an attack on Fort Sumter in April 1861. The cause of the Civil War, of course, was slavery. The north abolished slavery while the south insisted on its continuation. For four bloody years, the Union and the Confederacy fought over this issue.
While slavery was a significant factor that led the United States down the path toward fratricide, it might not have been the only reason for the war to break out when it did.
During the 1850s, gold from California flowed into the American economy. Wanting a piece of America’s economic boom, European capital flowed into the United States to finance economic development.
In 1853, war had broken out between Russia and the Ottoman Empire and Ireland had just emerged from its Great Famine. Agricultural production on the Continent had declined substantially, increasing European demand for American agricultural exports. But towards the end of the decade things changed. Steele writes:
By 1857, however, the boom was running out of steam. California gold production was leveling off; the Crimean War and poor harvests in Europe, which had stimulated demand for American exports, were over…Six thousand cotton looms in New England sat idle by that summer. (185)
While the Panic of 1857 didn’t affect the south the same way it did the north, it brought to light the incompatible differences between the northern and southern economies. The politics of the north were shaped by the economic consequences of the panic. By the time the economy stabilized, Abraham Lincoln had been elected the 16th president of the United States and tensions between the north and the south had finally boiled over.
Charleston was the seat of southern economic power during the colonial era; it’s not surprising then that South Carolina was the first state to secede from the Union in 1860. Economic panics happened throughout the 19th and early 20th centuries. While these panics may not have been the immediate cause of armed conflicts, they certainly set the conditions that made it possible for war to eventually break out.
The Civil War introduced the income tax. Socialism laid the political groundwork to make it stick.
Wars are expensive. Britain’s debt exploded following the Seven Years’ War. The king did the logical thing any indebted monarch would do: raise revenue through taxes.
Given that the colonies had been founded by companies and the residents of those colonies were kind-of-sort-of-but-not-really British subjects, this didn’t sit well with the merchants of Philadelphia and Boston. Yes, America fought a revolution over taxes but the need to tax wouldn’t have been necessary without a way.
The Civil War upended the American economy and thus the government’s funding for it. Governments have three ways to raise money: impose tariffs; print new money; or tax its population. In 1861, Congress enacted the country’s first income tax to help finance the war effort:
It originally called for a tax of 3 percent on incomes of more than $500 (then a middle-class income), rising to 5 percent on incomes of more than $10,000…In 1864 the income on taxes in excess of $10,000 doubled to 10 percent. (195)
By 1872, an income tax was no longer necessary. America’s post-war industrial base had grown substantially and tariffs were a sufficient source of revenue for the government. By the early 1900s, a conversation would return to taxes, this time becoming a more permanent fixture.
The rapid growth of industry in the United States led to the rapid enrichment of America’s capitalist class. Mansion’s like the Biltmore Estate were built as monuments to the elite during what is now known as the Gilded Age.
But in the mid-19th century, a German economist named Karl Marx published a pamphlet calling for a more equitable redistribution of the fruits of labor to the workers. Socialism took off in Europe first before making its way to the United States in the form of populism. Politicians like William Jennings Bryan laid the foundation for policies that would emerge during the Progressive Era in response to the ostentatious wealth flaunted by the elites of the Gilded Age.
The problem with imposing a tax on the rich is that it’s unconstitutional. The Constitution required direct taxes to be apportioned by states on the basis of population – not income.1 After the Panic of 1907, the view on an income tax changed. In 1913, the Constitution was amended, giving Congress the right to levy income taxes without regard to population size:
Among the first acts of the new Wilson administration was the passage of a personal income tax law.
Although almost comically short by later standards – the law was only fourteen pages long – it contained the seeds of the vast complexity that was to come. Income more than $3,000 was taxed, on a progressive scale from 1 to 7 percent. (276-7)
While socialism itself wasn’t the reason for the implementation of an income tax, the ideas behind socialism – that the wealth should be redistributed from the rich – gained political traction in the United States, making it more politically viable. Even if it’s desirable to tax the wealthy, it’s not possible to do so without singling them out as a distinct class of people. In order to tax the wealthy, you have to tax everyone. In that way, the passage of the Sixteenth Amendment made us all equal in the eyes of Uncle Sam.
The Great Depression was preceded by an agricultural depression in the 1920s. It didn’t start affecting Americans until a full two years after the stock market crashed. The real depression lasted three decades, coming to an end thanks in large part to the economic stimulation generated by World War II.
The 1920s may have been roaring for some Americans, but not everyone was living in a Gatsby-style party. The Treaty of Versailles led to hyperinflation in Germany, plunging Europe into economic hardship.
At the same time, increased production of automobiles in the United States changed transportation. Even though America had industrialized, agriculture was still an important part of the economy of the early 20th century. The combination of war and technological change had a deep impact on American farmers. Steele writes:
The automobile also put a far greater stress on the country’s rural economy as a whole. In 1900, one-third of the nation’s farmland was devoted to fodder crops to feed the vast number of horses and mules that powered the local-transportation and agricultural industries. By 1929 most of that herd was gone, replaced by automobiles, and much of the land that had grown such crops as hay and oats had been switched over to crops for human consumption, causing food supplies to rise much faster than demand and prices to decline sharply. The result was hard times for many farmers, who never saw prices recover from the fall-off in European orders after the First World War. The depression in American agriculture, largely unnoticed by the urban-based media at the time, would slowly, inexorably both deepen and widen. (301)
In earnest, the Great Depression began long before the stock market crashed in 1929. More Americans were engaged in farming than were invested in the stock market. And in 1930, the stock market had regained about 45% of what it lost in October 1929. The depression didn’t seem obvious until 1931 when things took a turn for the worst:
Unemployment by the end of 1931 rose to 15.9 percent, and the country’s roads began to fill up with men in shabby clothes searching in vain for a job, any job…In cities breadlines stretched for blocks and ramshackle communities of huts and lean-tos – dubbed Hoovervilles – spread in parks and open spaces as those who had lost their houses and apartments sought shelter. (324)
While FDR’s New Deal programs helped Americans survive during the Great Depression, it was World War II that actually ended it. During the war, the American economy had been transformed into a war-time economy, complete with wage and price controls. After the war, the GI Bill gave returning GIs access to credit to access affordable homes and an education to access better job opportunities. In 1954, the Dow reached the high it had attained in 1929, signaling the economy had finally recovered.
The Employment Act of 1946 transformed the American economy from a capitalist economy to a managed economy. Keynesianism, rather than capitalism, is the economic system governing the United States to this day.
While Adam Smith’s version of capitalism was the economic system the United States implemented at its founding, by the middle of the 20th century an entirely new economic system had emerged. The Great Depression had left a scar on the United States. The government wanted to do everything in its power to prevent another depression. In turn, it made itself responsible for ensuring it never happened again.
In 1936, British economist John Maynard Keynes published The General Theory of Employment, Interest, and Money. He laid the intellectual foundation for government management in the economy – something Smith would have vehemently opposed. In doing so, he also made the case for the government to use deficit spending to stimulate the economy.
The Employment Act of 1946 codified these theories into law and made economics a fixture of government policy moving forward. According to Steele:
It declared it the policy of the federal government to maximize employment, production, and purchasing power. (378)
By the time Kennedy took office in 1961, Keynesianism had replaced capitalism as the primary economic system driving the United States.
The first test of this new system came in 1971. Johnson’s Great Society and the cost of the war in Vietnam had dramatically increased government spending. As the government spent money it did not earn inflation followed. Guided by the tenets of Keynesian economics, the Federal Reserve attempted to reign in inflation by increasing the money supply. This led to stagflation, a combination of rising inflation and unemployment.
For the rest of the 20th century and up until the present day, the government would manage the economy directly by controlling interest rates, providing employment opportunities through the bureaucracy, and when necessary, printing new money to increase the supply in circulation.
Unfortunately, the book ends here. It was published in 2004 so the author was not able to provide his insights on the 2008 Financial Crisis. But just as the government stepped in to stem economic panics in the 1980s, it stepped in to bail out the banks and the auto industry in 2008. Much of the Keynesian policies of the 1970s and 1980s continue to this day.
Final takeaway.
The economy has been reduced to quarterly earnings calls and whether or not the Dow has risen or fallen. But as you can see, the economy is much more dynamic than that.
The economy represents a system that informs government policies and thanks to the transition to Keynesian economics in the 1960s, the economy now is government policy. It shapes legal documents, determines whether or not a war will break out, and if it does, its taxation and production helps alleviate the immediate consequences of war. The Fed’s decision to increase interest rates or the government’s decision to send out stimulus checks plays a fundamental role in all of our lives.
Yet the economic history of the United States is something that is overlooked and understudied. Just look at capitalism as an example of this. Many people think we live in a capitalist system and while we do politically – we can own capital and invest it – we don’t live in a capitalist economy or an economy governed solely by the forces of supply and demand as Adam Smith would have defined it.
While the American economy is federally managed today, we experience it differently depending on where we are within the economy. Main Street and Wall Street operate in separate economic realities. Just as Wall Street was unaware that the roaring 20s was when the seeds of depression were being sown in America’s heartland, the same is true of urban elites today.
While we know communism didn’t work, we’re still in the early stages of Keynesianism. It’s unclear for how much longer this system will last. Understanding how we got here can help you understand why the economy exists as it is right now and give you some insight into how it will continue to evolve in the future.
If you’re interested in learning more about the economic history of the United States, add An Empire of Wealth to your summer reading list. It dives into adjacent topics like technological advancements and the evolution of our banking system that are also important but were out of scope for this essay. You can get a copy wherever books are sold or borrow it from your local library.
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Article I, Section 9, Clause 4: No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken. https://constitution.congress.gov/browse/essay/artI-S9-C4-1/ALDE_00013592/