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WESTERN CULTURE AND SOCIETY: THE UNITED STATES OF
AMERICA (USA) -
The American Economy
Monetary policy is
the responsibility of the Federal Reserve System, an independent U.S.
government agency. "The Fed," as it is commonly known,
includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank
Money takes many
different forms, in its most basic form, money consists of coins and
paper currency. Coins come in various denominations based on the value
of a dollar: the penny, which is worth one cent or one-hundredth of a
dollar; the nickel, five cents; the dime, 10 cents; the quarter, 25
cents; the half dollar, 50 cents; and the dollar coin. Paper money comes
in denominations of $1, $2, $5, $10, $20, $50, and $100.
A more important
component of the money supply consists of checking deposits, or
bookkeeping entries held in banks and other financial institutions.
Individuals can make payments by writing checks, which essentially
instruct their banks to pay given sums to the checks' recipients. Time
deposits are similar to checking deposits except the owner agrees to
leave the sum on deposit for a specified period. Money also includes
money market funds, which are shares in pools of short-term securities,
as well as a variety of other assets that can be converted easily into
currency on short notice.
How the U.S. Economy
The United States is
often described as a "capitalist" economy, a term coined by
19th-century German economist and social theorist Karl Marx to describe
a system in which a small group of people who control large amounts of
money, or capital, make the most important economic decisions. Marx
contrasted capitalist economies to "socialist" ones, which
vest more power in the political system.
The American economy
is perhaps better described as a "mixed" economy, with
government playing an important role along with private enterprise.
The United States is
rich in mineral resources and fertile farm soil, and it is blessed with
a moderate climate. It also has extensive coastlines on both the
Atlantic and Pacific Oceans, as well as on the Gulf of Mexico. Rivers
flow from far within the continent, and the Great Lakes -- five large,
inland lakes along the U.S. border with Canada -- provide additional
shipping access. These extensive waterways have helped shape the
country's economic growth over the years and helped bind America's 50
individual states together in a single economic unit.
The number of
available workers and, more importantly, their productivity help
determine the health of an economy. Throughout its history, the United
States has experienced steady growth in the labor force, and that, in
turn, has helped fuel almost constant economic expansion. Until shortly
after World War I, most workers were immigrants from Europe, their
immediate descendants, or African-Americans whose ancestors were brought
to the Americas as slaves.
The United States is
said to have a mixed economy because privately owned businesses and
government both play important roles. The American free enterprise
system emphasizes private ownership. Private businesses produce most
goods and services, and almost two-thirds of the nation's total economic
output goes to individuals for personal use (the remaining one-third is
bought by government and business).
This emphasis on
private ownership arises, in part, from American beliefs about personal
freedom. From the time the nation was created, Americans have feared
excessive government power, and they have sought to limit government's
authority over individuals -- including its role in the economy.
There are limits to
free enterprise, however. Americans have always believed that some
services are better performed by public rather than private enterprise.
For instance, in the United States, government is primarily responsible
for the administration of justice, education (although there are many
private schools and training centers), the road system, social
statistical reporting, and national defense. In addition, government
often is asked to intervene in the economy to correct situations in
which the price system does not work. It regulates "natural
monopolies," for example, and it uses antitrust laws to control or
break up other business combinations that become so powerful that they
can surmount market forces.
provides welfare and unemployment benefits to people who cannot support
themselves, either because they encounter problems in their personal
lives or lose their jobs as a result of economic upheaval; it pays much
of the cost of medical care for the aged and those who live in poverty;
it regulates private industry to limit air and water pollution; it
provides low-cost loans to people who suffer losses as a result of
natural disasters; and it has played the leading role in the exploration
of space, which is too expensive for any private enterprise to handle.
Government's Role in the
Growth. Perhaps most importantly, the federal government guides the
overall pace of economic activity, attempting to maintain steady growth,
high levels of employment, and price stability. By adjusting spending
and tax rates (fiscal policy) or managing the money supply and
controlling the use of credit (monetary policy), it can slow down or
speed up the economy's rate of growth -- in the process, affecting the
level of prices and employment.
Control. The U.S. federal government regulates private enterprise in
numerous ways. Regulation falls into two general categories. Economic
regulation seeks, either directly or indirectly, to control prices.
Traditionally, the government has sought to prevent monopolies such as
electric utilities from raising prices beyond the level that would
ensure them reasonable profits. Another form of economic regulation,
antitrust law, seeks to strengthen market forces so that direct
regulation is unnecessary. The government -- and, sometimes, private
parties -- have used antitrust law to prohibit practices or mergers that
would unduly limit competition.
Each level of government provides many direct services. The federal
government, for example, is responsible for national defense, backs
research that often leads to the development of new products, conducts
space exploration, and runs numerous programs designed to help workers
develop workplace skills and find jobs. State governments, meanwhile,
are responsible for the construction and maintenance of most highways.
State, county, or city governments play the leading role in financing
and operating public schools. Local governments are primarily
responsible for police and fire protection.
Growth of Government
Intervention. Many laws and regulations have been enacted since the
1930s to protect workers and consumers further. It is against the law
for employers to discriminate in hiring on the basis of age, sex, race,
or religious belief. Child labor generally is prohibited. Independent
labor unions are guaranteed the right to organize, bargain, and strike.
The government issues and enforces workplace safety and health codes.
Nearly every product sold in the United States is affected by some kind
of government regulation: food manufacturers must tell exactly what is
in a can or box or jar; no drug can be sold until it is thoroughly
tested; automobiles must be built according to safety standards and must
meet pollution standards; prices for goods must be clearly marked; and
advertisers cannot mislead consumers.
The U.S. Economy: A
The modern American
economy traces its roots to the quest of European settlers for economic
gain in the 16th, 17th, and 18th centuries. The New World then
progressed from a marginally successful colonial economy to a small,
independent farming economy and, eventually, to a highly complex
industrial economy. During this evolution, the United States developed
ever more complex institutions to match its growth. And while government
involvement in the economy has been a consistent theme, the extent of
that involvement generally has increased.
first inhabitants were Native Americans -- indigenous peoples who are
believed to have traveled to America about 20,000 years earlier across a
land bridge from Asia, where the Bering Strait is today. (They were
mistakenly called "Indians" by European explorers, who thought
they had reached India when first landing in the Americas.) These native
peoples were organized in tribes and, in some cases, confederations of
tribes. While they traded among themselves, they had little contact with
peoples on other continents, even with other native peoples in South
America, before European settlers began arriving. What economic systems
they did develop were destroyed by the Europeans who settled their
In 1492, Christopher
Columbus, an Italian sailing under the Spanish flag, set out to find a
southwest passage to Asia and discovered a "New World." For
the next 100 years, English, Spanish, Portuguese, Dutch, and French
explorers sailed from Europe for the New World, looking for gold,
riches, honor, and glory. But the North American wilderness offered
early explorers little glory and less gold, so most did not stay. The
people who eventually did settle North America arrived later. In 1607, a
band of Englishmen built the first permanent settlement in what was to
become the United States.
Early settlers had a
variety of reasons for seeking a new homeland. The Pilgrims of
Massachusetts were pious, self-disciplined English people who wanted to
escape religious persecution. Other colonies, such as Virginia, were
founded principally as business ventures. Often, though, piety and
profits went hand-in-hand.
By 1770, the North
American colonies were ready, both economically and politically, to
become part of the emerging self-government movement that had dominated
English politics since the time of James I (1603-1625). Disputes
developed with England over taxation and other matters; Americans hoped
for a modification of English taxes and regulations that would satisfy
their demand for more self-government. Few thought the mounting quarrel
with the English government would lead to all-out war against the
British and to independence for the colonies.
Like the English
political turmoil of the 17th and 18th centuries, the American
Revolution (1775-1783) was both political and economic, bolstered by an
emerging middle class with a rallying cry of "unalienable rights to
life, liberty, and property" -- a phrase openly borrowed from
English philosopher John Locke's Second Treatise on Civil Government
(1690). The war was triggered by an event in April 1775. British
soldiers, intending to capture a colonial arms depot at Concord,
Massachusetts, clashed with colonial militiamen. Someone -- no one knows
exactly who -- fired a shot, and eight years of fighting began. While
political separation from England may not have been the majority of
colonists' original goal, independence and the creation of a new nation
-- the United States -- was the ultimate result.
Constitution, adopted in 1787 and in effect to this day, was in many
ways a work of creative genius. As an economic charter, it established
that the entire nation -- stretching then from Maine to Georgia, from
the Atlantic Ocean to the Mississippi Valley -- was a unified, or
"common," market. There were to be no tariffs or taxes on
interstate commerce. The Constitution provided that the federal
government could regulate commerce with foreign nations and among the
states, establish uniform bankruptcy laws, create money and regulate its
value, fix standards of weights and measures, establish post offices and
roads, and fix rules governing patents and copyrights. The
last-mentioned clause was an early recognition of the importance of
"intellectual property," a matter that would assume great
importance in trade negotiations in the late 20th century.
American farmers feared that a national bank would serve the rich at the
expense of the poor, the first National Bank of the United States was
chartered in 1791; it lasted until 1811, after which a successor bank
Revolution began in Europe in the late 18th and early 19th centuries,
and it quickly spread to the United States. By 1860, when Abraham
Lincoln was elected president, 16 percent of the U.S. population lived
in urban areas, and a third of the nation's income came from
Northern victory in
the U.S. Civil War (1861-1865), however, sealed the destiny of the
nation and its economic system. The slave-labor system was abolished,
making the large southern cotton plantations much less profitable.
Northern industry, which had expanded rapidly because of the demands of
the war, surged ahead. Industrialists came to dominate many aspects of
the nation's life, including social and political affairs. The planter
aristocracy of the South, portrayed sentimentally 70 years later in the
film classic Gone with the Wind, disappeared.
The rapid economic
development following the Civil War laid the groundwork for the modern
U.S. industrial economy. An explosion of new discoveries and inventions
took place, causing such profound changes that some termed the results a
"second industrial revolution." Oil was discovered in western
Pennsylvania. The typewriter was developed. Refrigeration railroad cars
came into use. The telephone, phonograph, and electric light were
invented. And by the dawn of the 20th century, cars were replacing
carriages and people were flying in airplanes.
As the American
economy matured in the 20th century, however, the freewheeling business
mogul lost luster as an American ideal. The crucial change came with the
emergence of the corporation, which appeared first in the railroad
industry and then elsewhere. Business barons were replaced by
"technocrats," high-salaried managers who became the heads of
corporations. The rise of the corporation triggered, in turn, the rise
of an organized labor movement that served as a countervailing force to
the power and influence of business.
technological revolution of the 1980s and 1990s brought a new
entrepreneurial culture that echoes of the age of tycoons. Bill Gates,
the head of Microsoft, built an immense fortune developing and selling
computer software. Gates carved out an empire so profitable that by the
late 1990s, his company was taken into court and accused of intimidating
rivals and creating a monopoly by the U.S. Justice Department's
antitrust division. But Gates also established a charitable foundation
that quickly became the largest of its kind.
The Postwar Economy:
feared that the end of World War II and the subsequent drop in military
spending might bring back the hard times of the Great Depression. But
instead, pent-up consumer demand fueled exceptionally strong economic
growth in the postwar period. The automobile industry successfully
converted back to producing cars, and new industries such as aviation
and electronics grew by leaps and bounds. A housing boom, stimulated in
part by easily affordable mortgages for returning members of the
military, added to the expansion.
The jump in postwar
births, known as the "baby boom," increased the number of
consumers. More and more Americans joined the middle class.
The United States
recognized during the postwar period the need to restructure
international monetary arrangements, spearheading the creation of the
International Monetary Fund and the World Bank -- institutions designed
to ensure an open, capitalist international economy.
entered a period marked by consolidation. Firms merged to create huge,
diversified conglomerates. International Telephone and Telegraph, for
instance, bought Sheraton Hotels, Continental Banking, Hartford Fire
Insurance, Avis Rent-a-Car, and other companies.
Growing demand for
single-family homes and the widespread ownership of cars led many
Americans to migrate from central cities to suburbs. Coupled with
technological innovations such as the invention of air conditioning, the
migration spurred the development of "Sun Belt" cities such as
Houston, Atlanta, Miami, and Phoenix in the southern and southwestern
states. As new, federally sponsored highways created better access to
the suburbs, business patterns began to change as well. Shopping centers
multiplied, rising from eight at the end of World War II to 3,840 in
1960. Many industries soon followed, leaving cities for less crowded
Years of Change: The
1960s and 1970s:
The 1960s and 1970s
were a time of great change. New nations emerged around the world,
insurgent movements sought to overthrow existing governments,
established countries grew to become economic powerhouses that rivaled
the United States, and economic relationships came to predominate in a
world that increasingly recognized military might could not be the only
means of growth and expansion.
President John F.
Kennedy (1961-1963) ushered in a more activist approach to governing.
During his 1960 presidential campaign, Kennedy said he would ask
Americans to meet the challenges of the "New Frontier." As
president, he sought to accelerate economic growth by increasing
government spending and cutting taxes, and he pressed for medical help
for the elderly, aid for inner cities, and increased funds for
education. Many of these proposals were not enacted, although Kennedy's
vision of sending Americans abroad to help developing nations did
materialize with the creation of the Peace Corps. Kennedy also stepped
up American space exploration. After his death, the American space
program surpassed Soviet achievements and culminated in the landing of
American astronauts on the moon in July 1969.
assassination in 1963 spurred Congress to enact much of his legislative
agenda. His successor, Lyndon Baines Johnson (1963-1969), sought to
build a "Great Society" by spreading benefits of America's
successful economy to more citizens. Federal spending increased
dramatically, as the government launched such new programs as Medicare
(health care for the elderly), Food Stamps (food assistance for the
poor), and numerous education initiatives (assistance to students as
well as grants to schools and colleges).
also increased as American's presence in Vietnam grew. What had started
as a small military action under Kennedy mushroomed into a major
military initiative during Johnson's presidency. Ironically, spending on
both wars -- the war on poverty and the fighting war in Vietnam --
contributed to prosperity in the short term. But by the end of the
1960s, the government's failure to raise taxes to pay for these efforts
led to accelerating inflation, which eroded this prosperity. The
1973-1974 oil embargo by members of the Organization of Petroleum
Exporting Countries (OPEC) pushed energy prices rapidly higher and
created shortages. Even after the embargo ended, energy prices stayed
high, adding to inflation and eventually causing rising rates of
unemployment. Federal budget deficits grew, foreign competition
intensified, and the stock market sagged.
The Vietnam War
dragged on until 1975, President Richard Nixon (1969-1973) resigned
under a cloud of impeachment charges, and a group of Americans were
taken hostage at the U.S. embassy in Teheran and held for more than a
year. The nation seemed unable to control events, including economic
affairs. America's trade deficit swelled as low-priced and frequently
high-quality imports of everything from automobiles to steel to
semiconductors flooded into the United States.
But the most
important element in the war against inflation was the Federal Reserve
Board, which clamped down hard on the money supply beginning in 1979. By
refusing to supply all the money an inflation-ravaged economy wanted,
the Fed caused interest rates to rise. As a result, consumer spending
and business borrowing slowed abruptly. The economy soon fell into a
The Economy in the
The nation endured a
deep recession throughout 1982. Business bankruptcies rose 50 percent
over the previous year. Farmers were especially hard hit, as
agricultural exports declined, crop prices fell, and interest rates
rose. But while the medicine of a sharp slowdown was hard to swallow, it
did break the destructive cycle in which the economy had been caught. By
1983, inflation had eased, the economy had rebounded, and the United
States began a sustained period of economic growth. The annual inflation
rate remained under 5 percent throughout most of the 1980s and into the
The American people
expressed their discontent with federal policies by turning out Carter
in 1980 and electing former Hollywood actor and California governor
Ronald Reagan as president. Reagan (1981-1989) based his economic
program on the theory of supply-side economics, which advocated reducing
tax rates so people could keep more of what they earned.
The 1990s and Beyond:
The 1990s brought a
new president, Bill Clinton (1993-2000). A cautious, moderate Democrat,
Clinton sounded some of the same themes as his predecessors. After
unsuccessfully urging Congress to enact an ambitious proposal to expand
health-insurance coverage, Clinton declared that the era of "big
government" was over in America.
With the fall of the
Soviet Union and Eastern European communism in the late 1980s, trade
opportunities expanded greatly. Technological developments brought a
wide range of sophisticated new electronic products. Innovations in
telecommunications and computer networking spawned a vast computer
hardware and software industry and revolutionized the way many
industries operate. The economy grew rapidly, and corporate earnings
rose rapidly. Combined with low inflation and low unemployment, strong
profits sent the stock market surging; the Dow Jones Industrial Average,
which had stood at just 1,000 in the late 1970s, hit the 11,000 mark in
1999, adding substantially to the wealth of many -- though not all --
Clinton, like his
predecessors, had continued to push for elimination of trade barriers. A
North American Free Trade Agreement (NAFTA) had further increased
economic ties between the United States and its largest trading
partners, Canada and Mexico. Asia, which had grown especially rapidly
during the 1980s, joined Europe as a major supplier of finished goods
and a market for American exports. Sophisticated worldwide
telecommunications systems linked the world's financial markets in a way
unimaginable even a few years earlier.
Inequality - Americans are proud of their economic system, believing it
provides opportunities for all citizens to have good lives. Their faith
is clouded, however, by the fact that poverty persists in many parts of
the country. Government anti-poverty efforts have made some progress but
have not eradicated the problem. Similarly, periods of strong economic
growth, which bring more jobs and higher wages, have helped reduce
poverty but have not eliminated it entirely.
government's chief source of funds to cover its expenses is the income
tax on individuals, which in 1999 brought in about 48 percent of total
federal revenues. Payroll taxes, which finance the Social Security and
Medicare programs, have become increasingly important as those programs
have grown. In 1998, payroll taxes accounted for one-third of all
federal revenues; employers and workers each had to pay an amount equal
to 7.65 percent of their wages up to $68,400 a year. The federal
government raises another 10 percent of its revenue from a tax on
corporate profits, while miscellaneous other taxes account for the
remainder of its income. (Local governments, in contrast, generally
collect most of their tax revenues from property taxes. State
governments traditionally have depended on sales and excise taxes, but
state income taxes have grown more important since World War II.)
From the outset, the
income tax has been a progressive levy, meaning that rates are higher
for people with more income. Most Democrats favor a high degree of
progress, arguing that it is only fair to make people with more income
pay more in taxes. Many Republicans, however, believe a steeply
progressive rate structure discourages people from working and
investing, and therefore hurts the overall economy. Accordingly, many
Republicans argue for a more uniform rate structure. Some even suggest a
uniform, or "flat," tax rate for everybody.
years, lawmakers have carved out various exemptions and deductions from
the income tax to encourage specific kinds of economic activity. Most
notably, taxpayers are allowed to subtract from their taxable income any
interest they must pay on loans used to buy homes. Similarly, the
government allows lower- and middle-income taxpayers to shelter from
taxation certain amounts of money that they save in special Individual
Retirement Accounts (IRAs) to meet their retirement expenses and to pay
for their children's college education.
The Tax Reform Act
of 1986, perhaps the most substantial reform of the U.S. tax system
since the beginning of the income tax, reduced income tax rates while
cutting back many popular income tax deductions (the home mortgage
deduction and IRA deductions were preserved, however). The Tax Reform
Act replaced the previous law's 15 tax brackets, which had a top tax
rate of 50 percent, with a system that had only two tax brackets -- 15
percent and 28 percent. Other provisions reduced, or eliminated, income
taxes for millions of low-income Americans.
Stocks, Commodities and
virtually every major US city once had a stock market, but by the 1990s
there were only three major markets: New York, Chicago, and San
Francisco. Local markets persisted in such cities as Boston,
Massachusetts, and Philadelphia, Pennsylvania, but trading was limited.
The modern markets,
particularly those in New York and Chicago, rely heavily on
computerization each day to process millions of transactions. But also,
in part, it is a matter of tradition and experience. The stock market
works largely on one broker's trust in another broker's word. The
brokers, in turn depend on the faith of the customers they represent.
The principles of
this market are similar to all others. For every buyer there has to be a
seller. When more people wish to buy than to sell, the price tends to
rise; when fewer people wish to buy and many wish to sell, the price
tends to fall.
Once a company has
sold its original stock to the public and it is traded freely in the
market, the price will be determined continuously during the trading day
by what buyers will pay and what sellers will take. It is simply a
matter of supply and demand.
When a company makes
money it usually pays a part of its earnings to its shareholders in the
form of dividends. A typical payout is about 50 percent of the earnings.
Each year every
stockholder receives an annual report about the company in which he or
she has an investment. These annual reports have changed much over the
last 20 or 30 years. Previously, the typical report would consist of a
general discussion of the health of the company, without any comparisons
to previous years. Now virtually all major corporations give very
detailed reports. They provide easy-to-read charts and summaries,
usually covering a 10-year period. A certified public accounting firm,
after performing an audit, certifies that the figures and statements
about the finances reflect generally accepted accounting principles. In
addition to this information, company executives are required to
disclose the extent of their holdings in the company. The entire process
is supervised in great detail by the Securities and Exchange Commission
(SEC), often described as a "watchdog" agency of the federal
While there are
literally thousands of stocks, the ones bought and sold most actively
are usually listed on the New York Stock Exchange (NYSE). The exchange
dates back to 1792 when a group of stockbrokers gathered on Wall Street
in New York City to make some rules about how buying and selling was to
be done. The NYSE has become the leading exchange in the United States,
but the American Stock Exchange also operates in the same Wall Street
area, and in much the same way, but on a smaller scale.
The largest security
market in the world in terms of the number of different stocks and bonds
traded is the over-the-counter (OTC) market. OTC is not located in any
one place, but is primarily an electronic communications network of
stock and bond dealers. These stocks are supervised by the National
Association of Securities Dealers, Inc., which has the power to expel
companies or dealers determined to be dishonest or insolvent. The
over-the-counter market tends to get stocks of smaller companies, and by
the 1990s had come to be known as a market where many of the fastest
growing "high-technology" stocks could be bought and sold.
The prices of
commodities -- such as crops, livestock and such metals as copper, gold,
lead and tin -- tend to fluctuate from one period of time to the next.
Commodity traders fall into two broad categories: hedgers and
speculators. Hedgers are business firms (or individuals) that enter into
a commodity contract to be assured access to the commodity at a
guaranteed price. A firm secures a needed commodity and is protected
against price fluctuation. Thousands of individuals, in contrast, trade
in commodity futures as speculators.
The main index
measuring market activity in the United States is called the Dow-Jones
Industrial Average (normally referred to as simply the Dow Jones)