Economic Policy

Economic policy has shifted many times over the course of American history. During colonial times, the British colonies operated under a mercantilist system in which all trade benefited the mother country. After the American Revolution, the fledgling United States attempted to operate under the Articles of Confederation, but the economic restrictions it placed on the national government caused that system to fail. Delegates meeting at the Constitutional Convention agreed that the federal government must have the power to tax. A decision to tax only imports, not exports or direct income, proved to be decisive in the development of domestic industry. Congress passed revenue tariffs (taxes on imports) during the early years of the Republic; after the War of 1812, a shift to protective tariffs occurred. These tariffs continued to increase reaching their apex during the Civil War under the Morrill Tariff. After the Civil War, tariff rates remained high, ensuring the rise of big business that did not have to compete against foreign manufacturers. The extreme wealth accumulated by captains of industry such as Andrew Carnegie and John D. Rockefeller stood in sharp contrast to the poverty of many Americans, especially new immigrants who crowded into tenements in major cities in the North and East. Public awareness of this economic inequity resulted in a movement to replace the tariff as the primary source of tax revenue with a direct personal income tax. However, Congress lacked constitutional authority to institute such a tax unless the states passed a constitutional amendment to allow direct taxation. Republicans finally agreed to lower the tariff rates if the amendment passed, thinking that the states would fail to pass it. The plan failed, and ratification in 1913 of the Sixteenth Amendment opened the door for direct taxation—a shift that has influenced capital accumulation, investment, and personal savings ever since. that has influenced capital accumulation, investment, and personal savings ever since.

After reducing the tariff rates and increasing personal income tax rates, Congress once again increased import duties because of World War I. After that conflict, European countries that had been carved out of the old empires raised their tariff rates to protect their own industries. Consequently, trade slowed at the same time that the U.S. stock market collapsed under the burden of overvaluation of company worth and market overstimulation due to purchases on margin. Within nine months of the crash,Congress passed the Hawley- Smoot Tariff, which raised tariff rates to a record high.Meanwhile, the Federal Reserve Board increased interest rates, contracting the money supply. The net effect was a prolonged depression that finally ended when the United States entered World War II.

The Great Depression and World War II mark a shift in U.S. economic policy. President Franklin D. Roosevelt followed the economic philosophy of John Maynard Keynes, who advocated deficit spending during periods of financial difficulty. Deficit spending would allow the federal government to initiate programs that politicians had traditionally shunned. For the first time, the federal government assumed the role of employer to thousands of the country’s unemployed workers. Programs like the Civilian Conservation Corps and Works Progress Administration created jobs. Social Security was established to promote early retirement and so open up jobs to younger workers. In addition, the federal government funded projects such as the Rural Electrification Administration and the Tennessee Valley Authority to improve the lives of Americans in rural or poverty-stricken areas.