Key Economic Events in U.S. History

The Industrial Revolution and the postwar boom

In plain words: Machines moved work from farms and homes into factories and cities.

Industrial Revolution (about 1800–1920). Picture a family spinning thread by hand at home. Now picture a mill where one water wheel runs rows of spinning machines. That change is the heart of the Industrial Revolution — the shift from hand tools and farms to machines and factories. Early textile mills in New England used water power to spin cotton into cloth. After the Civil War, industry grew much faster. Key drivers:

• Railroads. The first transcontinental railroad (1869) linked the East and West coasts. Now factories could sell to buyers across the whole nation.
• New technology. Steel made by the Bessemer process changed building. So did electricity and the telephone. Later came the assembly line (Henry Ford, 1913). All of these made goods cheaper.
• Workers. Farm machines (reapers, steel plows, tractors) meant farms needed fewer hands. Millions of rural Americans moved to cities. Millions of immigrants came too.
• Big business. Giant firms such as Standard Oil grew powerful. Working conditions were harsh, and this led workers to form labor unions.

Example: In 1840, about 69% of U.S. workers farmed. By 1900, it was about 41%. By 2000, it was about 2%. A graph of this drop is classic GED material.

Post–World War II boom (late 1940s–1960s). In plain words: after the war, Americans had jobs, money, and things they wanted to buy.

World War II production ended the Depression. After the war, several forces created two decades of strong growth:

• pent-up demand — people were ready to buy things they could not get during the war;
• the GI Bill, which paid for veterans' education and home loans;
• new homes built in the suburbs;
• the interstate highway system (1956);
• cheap energy.

Family incomes rose. A large middle class bought houses, cars, and televisions.

The Great Depression and the New Deal

In plain words: The Depression was the worst economic collapse in U.S. history. Many problems hit at the same time.

Causes of the Great Depression. No single cause explains it. Think of a table that falls because several legs break at once. The GED expects you to know several causes:

1. Stock speculation. In the 1920s, many people bought stocks "on margin" — with borrowed money. Prices crashed in October 1929. Then these buyers could not repay their loans.
2. Bank failures. About 9,000 banks failed from 1930 to 1933. There was no deposit insurance, so savers lost everything. Fear spread, and bank runs spread with it.
3. Falling demand. Families without jobs stopped buying. So factories cut more jobs. Then even fewer people could buy. This is a downward spiral.
4. A shrinking money supply. The Federal Reserve let the money supply fall by about a third.
5. Trade collapse. The Smoot-Hawley Tariff (1930) raised taxes on imports. Other countries struck back, and world trade shrank.
6. Farm crisis. Crop prices were already low in the 1920s. Then the Dust Bowl drought hit the Plains in the 1930s.

Example: Unemployment rose from 3.2% in 1929 to 24.9% in 1933. That is about 1 in 4 workers without a job.

The New Deal (1933–1939): the three R's. In plain words: President Franklin D. Roosevelt's government tried to help people now, fix the economy, and stop a repeat.

Unemployment fell from 1933 to 1937. But it jumped again in 1938, after the government cut spending and the Federal Reserve tightened credit. Only the huge military buildup of World War II brought unemployment down to very low levels. The New Deal made the federal government's role in the economy permanently bigger.

Stagflation in the 1970s

In plain words: Stagflation means prices rise fast while jobs disappear. Two bad things happen at once.

Usually, inflation and unemployment move in opposite directions:

• In a boom, jobs are easy to find, but prices rise faster.
• In a slump, more people lose jobs, but prices rise more slowly.

Think of a busy restaurant. When crowds come in, it hires more cooks and can raise menu prices. When the crowds stop, it cuts staff and holds prices down. The 1970s broke this pattern. Prices and unemployment were both high.

Causes:

• Oil shocks. In October 1973, Arab members of OPEC placed an oil embargo (a ban on trade) on the United States. They did this because the U.S. supported Israel in the Yom Kippur War. Oil prices roughly quadrupled — they became about four times higher. A second shock followed the 1979 Iranian Revolution. Higher energy costs raised the price of almost everything. They also forced businesses to cut workers.
• Earlier spending on the Vietnam War and social programs had already pushed prices up.

Example: From 1973 to 1975, inflation rose from 6.2% to 9.1%. Unemployment rose from 4.9% to 8.5%. Both went up at once. By 1980, inflation reached 13.5%.

The cure. Fed Chair Paul Volcker raised interest rates sharply around 1979–1981. Higher rates made loans cost more, so people and businesses spent less. Inflation fell. But the cost was a deep recession in 1981–1982, when unemployment rose above 10%.

The 2008 financial crisis

In plain words: Risky home loans went bad. Banks lost huge sums, and the whole economy slid into a deep recession.

Causes.

1. In the 2000s, home prices climbed fast.
2. Lenders gave subprime mortgages — home loans to borrowers with weak credit. Many had low "teaser" rates that later jumped. When the rate jumped, the monthly payment jumped too.
3. Banks bundled many mortgages together into securities (investments that can be bought and sold). They sold them around the world. Many firms borrowed heavily to buy them.
4. Home prices fell in 2006–2007. Many borrowers defaulted — they stopped paying their loans.
5. The securities collapsed in value. Banks that held them faced huge losses.
6. In September 2008, Lehman Brothers went bankrupt, and lending froze.

Effects. The Great Recession lasted from December 2007 to June 2009. It was the worst downturn since the 1930s. Unemployment peaked at 10.0% in October 2009. Millions of families lost homes to foreclosure — the lender taking back a home when the loan is not paid.

Responses:

• TARP (October 2008): up to $700 billion to stabilize banks and automakers.
• Federal Reserve: cut its key interest rate to nearly zero and bought bonds.
• American Recovery and Reinvestment Act (2009): a stimulus of roughly $800 billion.
• Dodd-Frank Act (2010): tighter rules on large banks. It also created a consumer financial protection agency.

Comparison: Leaders had learned from the 1930s, so they acted quickly. Deposit insurance helped prevent runs by ordinary savers. Unemployment peaked far below the Depression's 24.9%.