The American Way of Growth, Part I

Source: The American Conservative

The 20th century was the American Century. Over the course of it, the United States became the richest nation in the world with the most affluent average worker in the world. But it is an open question whether the U.S. can continue its fantastic economic success in the 21st century. Productivity growth has been anemic since 2000, inequality has grown, and polarization has made the political system more dysfunctional than at any time in living memory.

Economic performance lies behind many social and political changes. A better understanding of what drove the superlative American economic growth rates of the 19th and 20th centuries can help us appreciate how to recover that lost growth record. These essays focus on the two most important growth drivers in U.S. history: the focus on the domestic market and choosing the right growth industries. 

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In the early days of the Republic, the federal government pursued a free trade approach to international commerce, influenced by Adam Smith’s The Wealth of Nations and the French physiocrats. Alexander Hamilton’s “Report on Manufactures” of 1791 urged the federal government to sponsor new industrial enterprises to produce iron, brass, gunpowder, and textiles. In Hamilton’s words: “Human enterprise ought to be left free in the main…but practical politicians know that it may be beneficially stimulated by prudent aids and encouragements on the part of government.”

It took the actions of Britain to turn the federal government to protectionism. During the Napoleonic Wars, Britain and France both harassed American shipping, but Britain’s actions were more outrageous and more offensive to the young Republic’s sense of independence. Until then, President Thomas Jefferson, the nation’s leading intellectual and Francophile, had vehemently opposed manufacturing and favored free trade. But in 1807, he asked Congress to enact an embargo on trade with Britain and France. Subsequent acts of Congress and the War of 1812 suppressed the vast majority of U.S. international trade.

The result was an immediate boom in U.S. manufacturing. According to economist Frank Taussig, in 1803 there were only four cotton factories in the U.S., operating perhaps 2,000 spindles. By 1815, there were hundreds of factories operating 500,000 spindles. The same was true for other important early industries. “Establishments for the manufacture of cotton goods, woollen cloths, iron, glass, pottery, and other articles sprang up with a mushroom growth,” Taussig wrote.

In 1815, the Napoleonic Wars ended, and peacetime goods flooded American and European markets, causing depression everywhere. President James Madison responded with the Tariff of 1816, which gave a boost to key industries including cotton, wool, and iron. Once again, the British helped to cement Americans’ preference for protection, along with contempt for their mother country. British Member of Parliament Lord Brougham provided a strikingly clear argument for America to use protective support for infant industries when he told Parliament: “It was well worthwhile to incur a loss upon the first exportation in order, by the glut, to stifle in the cradle those rising manufactures in the United States which the war had forced into existence contrary to the natural state of things.” Lord Brougham was arguing for deliberate British dumping to destroy America’s young industries. Two centuries later, China would deploy similar tactics to try to destroy aging American industries.

From 1816 until 1930, the U.S. continued to use tariffs, with rates ranging from 20 percent to 100 percent to protect home manufacturing industries from imports. The combination of a large captive home market and an entrepreneurial culture made the U.S. the world’s outstanding economic success story. In iron and steel, every major technical innovation between 1750 and 1850 occurred in Britain. Yet the U.S. steel industry grew rapidly, especially after the Civil War, when Congress enacted tariffs on pig iron and then tariffs of 28 percent on steel rails in 1870, and soon surpassed the British industry in scale and technical sophistication.

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The railroad and its related industries—steel, railroad cars, coal and iron mining, and others—powered America’s first industrial revolution, lifting millions of Americans out of poverty. Andrew Carnegie, a Scottish immigrant, founded the Carnegie Steel Company in 1872. Over the next two decades, Carnegie built the world’s largest, most successful, and most profitable steel company. In his autobiography, Carnegie linked the rise of the U.S. steel industry directly to the decisions to levy protective tariffs:

The Civil War had resulted in a fixed determination upon the part of the American people to build a nation within itself, independent of Europe in all things essential to its safety.… Protection has played a great part in the development of manufacturing in the United States.… Capital no longer hesitated to embark in manufacturing, confident as it was that the nation would protect it as long as necessary.

4H: High Growth, High Profit, High Productivity, High Wage

Since colonial times, America had been a country of plentiful land, relatively scarce labor, and high wages relative to Europe. In all these industries, the story was the same: rapid industrial growth and high profit created a demand for workers. The only way the entrepreneurs could meet that demand was to raise wages. As a result, the growth industries led the upward movement in incomes for the average American worker. As workers were pulled up to steel areas, for instance, shortages in other regions and industries pulled up wages.

Perhaps the best example of this was the decision by George Pullman in 1868 to employ African Americans as sleeping car porters. Pullman had little interest in racial or political issues. He was simply driven by the huge opportunity to build sleeping cars and sell them to railroads. He needed men as porters and freed slaves were a ready workforce. Half a century later, the role of sleeping car porter came to be seen by African Americans as the premier path to the middle class. 

From the 1870s, labor unions were quick to organize in these growth industries. Once workers had good wages to protect, they developed the determination to protect them through unionization. Ruthless entrepreneurs like Carnegie and Pullman worked with unions but did not hesitate to drive wages down when prices and profits declined, leading to bloody strikes. Among labor union members and especially their leaders, the popular narrative was that these bosses were cruel and greedy oppressors of labor. But they also knew that these industries remained the American worker’s best opportunity. High growth in industries like steel led to high profits, which enabled investment, which in turn enabled high productivity, which led to high wages. 

These are the four Hs of industrial success: every nation that wants to deliver prosperity to its working population needs industries that are high-growth, high-profit, high-productivity, and high-wage. In testimony to the U.S. International Trade Commission in July, I showed how the new steel mills built in the American heartland since 2018 provided two to three times the pay of traditional businesses located in that area. Last year, America’s major steel companies paid a median annual income to their entire workforce of $117,200—four times what America’s largest private employer, Walmart, pays employees and double what the average American worker earns. At the two most technologically advanced steelmakers, Nucor and Steel Dynamics, profit sharing and bonuses make up a large portion of that pay.

With America’s second Industrial Revolution, that of the automobile and home electrification, the transformation of the average American’s life exceeded even the rail-and-steel revolution of the 19th century. Henry Ford’s development of the Model T and the mass production system used to produce it was the most important single development in creating a middle-class society in American, and perhaps world, history. Between 1910 and 1923, Ford cut the price of the Model T from $950 to $269. At the latter price, it cost roughly half of a worker’s annual income to buy one, and the widely available credit plans made it still more affordable. “By 1930, there were almost as many motor vehicles as households in the United States and an astonishing 78% of the world’s automobiles were registered in the United States,” writes economist Robert Gordon. Today, the cost of the average motor vehicle is still close to 50 percent of the average worker’s income, suggesting not much progress has been made since then.

On January 5, 1914, struggling to find workers to meet demand for his Model Ts, Henry Ford announced that he was doubling the wage of all Ford factory workers, from $2.50 a day to $5 a day. America was stunned. For days afterward, the Detroit train station was in chaos, with men arriving from all over the country seeking directions to Ford headquarters. Newspaper stories about Ford employment policies further revealed that the company employed a team of ten doctors and 100 nurses to keep employees healthy, as well as legal staff to help workers buy houses and language staff to help immigrant employees learn English. Henry Ford became the first major automaker to employ African Americans in routine factory work instead of menial jobs, when in 1914 he brought a former bricklayer, William Perry, into the Ford works. 

Perry had worked with Ford in 1888, cutting down trees on Ford’s farm. In 1914, Perry developed a heart condition and could no longer lay bricks. He asked Ford for help. Ford gave him a job and gave Perry’s foreman one simple order: “See that he’s comfortable.” Perry worked for Ford until his death at age 87 in 1940. When he died, Ford went to his widow’s house to pay his respects. Here was America’s richest man, an international celebrity, going to an African-American neighborhood in Detroit in 1940 to pay his respects to an elderly black widow. In 1926, there were 10,000 African Americans employed at Ford Motor Company.

Muckraker Ida Tarbell came to Ford’s Dearborn headquarters to write an expose of the oppressive Ford system. She ended up praising it: “I don’t care what you call it—philanthropy, paternalism, autocracy, the results which are being obtained are worth all you can set against them.” In the 1920s, a public opinion poll asked Americans who were the greatest men who ever lived. The results were, in order: Jesus Christ, Napoleon Bonaparte, Henry Ford.

The third American Industrial Revolution, which starts with IBM and extends through the Digital Equipment Corporation, Intel, Microsoft, Apple, Google, VMware and Amazon, is still with us. Like the earlier revolutions, it involves visionary entrepreneurs, extraordinary growth rates at each company, and high wages and bonuses paid to hundreds of thousands of employees. 

It is important to note that as a general rule, visionary entrepreneurs are not nice people. Deep and persistent economic growth for a large population comes not from compassion, but from necessity. One could use the words greed or egomania to describe the motivations of many of these exceptional entrepreneurs. Yet through their brash self-belief and relentless, obsessive efforts to overturn the existing order, these men contributed enormously to America’s economic success.

This article is part of the American System series edited by David A. Cowan and supported by the Common Good Economics Grant Program. The contents of this publication are solely the responsibility of the authors.