AN ERA OF ECONOMIC INSTABILITY, 1897–1920 (OVERVIEW)

The period in U.S. economic history between 1897 and 1920 was marked by prosperity and expansion. U.S. industry (especially the new industries that took advantage of new sources of power and new organization of labor) experienced giant gains in productivity. Agriculture also experienced productivity improvements because of the use of the internal combustion tractor and other mechanized farm implements. It was an era of mergers and the business sector expanded by consolidating clusters of sizeable businesses into monster corporations. The government set out to establish safe investment havens for U.S. corporations in Central and South America with the resulting rise in foreign trade. The national economy boomed during World War I (1914–1918). But nearly every period of expansion was countered by a downturn. Unbridled business expansion also brought governmental regulation and monitoring agencies. World War I stimulated the economy, especially heavy industry. After the war the agricultural sector of the economy began to experience weakness in some areas and the polarization of wealth began negatively to affect the domestic market. The nation as a whole vacillated between prosperity economic instability.

By 1890 the United States had conquered a contiguous stretch of the North American continent. The Bureau of the Census announced in 1890 that the frontier, as a line of settlement, no longer existed. As the economy continued to expand, business and political interests began to worry about an economy that was so productive that the domestic market was insufficient to soak up the product. They began to look to international investments and international markets to solve the problem of "overproduction." In 1898 the United States intervened in a Cuban revolt against Spain. During the ensuing Spanish American War (1898), the United States conquered Cuba, Puerto Rico, Guam, and the Philippines. When the war was over the United States had its own empire: it retained control of Puerto Rico, Guam, and the Philippines, and established dominance over independent Cuba. (The Philippines was granted independence in 1946, but Puerto Rico and Guam remain U.S. possessions. Dominion over Cuba was relinquished in 1934.)

AN ERA OF ECONOMIC INSTABILITY, 1897–1920 (OVERVIEW)

During the early twentieth century the U.S. expansionist agenda continued. In 1903 the United States encouraged Panama to separate from Columbia and form a new republic. Then under a treaty signed late in the same year the United States was given the right to build and control a canal in Panama. In addition the United States intervened in the Dominican Republic in 1905, Nicaragua in 1912, and Haiti in 1915. These interventions resulted in the U.S. taking financial control of these countries and retaining control into the 1930s. A period of prosperity followed the Spanish American War, and the U.S. economy was bolstered by profits from these newly acquired holdings in South and Central America.

Prosperity in the early 1900s was linked to additional, domestic factors. The United States officially went on the gold standard in 1900. Prices began to rise for two reasons: new discoveries and increased mining expanded the gold supply, and the government issued more bank notes. Thus the per capita circulation of money increased from $23.85 in 1893 to $33.86 by 1907. Moreover the general price level rose 70 percent between 1896 and 1914, and per capita income rose from $480 to $567 between 1900 and 1920. During roughly the same period the population increased 40 percent from 76.2 million to 106 million, the number of factories increased 32 percent, capital investments soared by 250 percent, and the value of products rose 222 percent. Prosperity carried over to farmers, too. Between 1910 and 1920 gross farm income rose from $7.4 billion to $15.9 billion, and the value of farm property shot up 400 percent.

Prosperity was accompanied by the growth of super-large corporations and consolidations in the business world. There was a wave of consolidations (or mergers) between 1897 and 1904 that fundamentally changed the nature of the U.S. corporate system. By 1904 there were 236 giant industrial corporations with total capital of more than $6 billion. In addition, 95 percent of railroad track in the country had come under the control of six groups, and 1,330 public service companies had been consolidated into a mere handful.

Consolidation mania was a response to unbridled competition; business owners sought to establish some control over an unstable market and wild price fluctuations. One solution was merger and monopoly. Corporate heads and financiers were impressed by the results of three early mergers—Standard Oil, American Tobacco, and American Sugar. All three consolidated corporations had prospered handsomely. It seemed clear that through consolidation competition could be reduced, prices controlled, and markets equitably divided. Assisted by professional promoters and investment bankers, competitors in many industries narrowed their differences and combined their strengths. The steel industry, the copper industry, the smelting and refining industry, and the meat packing industry were among the business sectors that most actively merged assets and production processes. The consolidation movement paused in 1904 because by then almost all of the major industries were consolidated, and because the federal government began to accuse the resulting corporations of violating anti-trust laws.

It was this emergence of government regulation that offered another solution to the instability and erratic economic climate of unrelenting competition. Smaller would-be competitors found the regulated economy more difficult to break into. As the giant business consolidations emerged there arose a simultaneous demand for their regulation. The public appreciated the vast array of products and services provided by business, but they feared the great wealth and power of the corporate leaders. Political leaders responded and the result was a renewed interest by the federal government in controlling, or at least overseeing the relationship between business and society. These government efforts toward regulating business characterized the Progressive Era. The Progressive Era (roughly 1901 to 1920) was associated with the presidencies of Theodore Roosevelt (1901–1909), William Howard Taft (1909–1913), and Woodrow Wilson (1913–1921).

Roosevelt was regarded as the most progressive of the three. He used the Sherman Anti-Trust Act of 1890 to dissolve several large corporations, and he favored the passage of several regulatory laws. The Hepburn Act of 1906 increased the power of the Interstate Commerce Commission (created in 1887), The Pure Food and Drug Act of 1906 created the Food and Drug Administration (FDA) to define and enforce quality standards in products manufactured for human consumption. Roosevelt also placed great emphasis on the conservation of national resources. By presidential decree he added millions of acres to the protective status of national parks and forests, and he prohibited the exploitation of certain important oil and coal lands by private enterprise. But there were limits to Roosevelt's radicalism. Though he knew there was a need for tariff revision (tariff rates were very high) and banking reform, Roosevelt did not touch these issues for fear that a conservative reaction would split the Republican party.

Few reforms occurred while Taft was in office (although Taft continued to prosecute anti-trust cases), but under Wilson there were several notable achievements. Tariffs were reduced and Congress passed the Clayton Anti-Trust Act (1914) and the Federal Trade Commission Act (1914). These were designed to alleviate certain unfair business practices in an effort to inhibit corporate mergers. They marked an important step forward for those who favored the regulation of business, but in the long run were not very effective. Business consolidations continued to be an important element of the U.S. economy.

Wilson's most important contribution was the Federal Reserve Act. The Federal Reserve System was designed to eliminate the defects of the most recent reform in the banking system—back in 1863. Chief among these defects was the inelasticity of currency— meaning, the money supply did not fluctuate with the needs of business. Instead the money supply fluctuated with the needs of the government because the amount of currency in circulation was directly tied to the volume of government bonds sold to the banks. Banks could only issue currency amounts equal to the value of the bonds they owned.

The Federal Reserve System divided the country into 12 districts, each with a Federal Reserve Bank. These were "bankers' banks;" that is, they did not deal directly with the public. They loaned money to commercial banks, governed the interest rate, and issued Federal Reserve Notes. The result of the Federal Reserve System was that the volume of currency in circulation tended to fluctuate with the needs of business as determined by a governing board in Washington, D.C.

In the same year that the Federal Reserve Act passed through Congress, 1914, war broke out in Europe. The U.S. did not enter World War I until 1917, but the war had a significant effect on the U.S. economy from the outset. The United States served as the major source of raw materials, foodstuffs, and supplies to Europe; thus the war generated enormous industrial and agricultural expansion. The Gross National Product (GNP) increased by 15 percent between 1914 and 1918. During the same period the production of all types of metals increased substantially and there was an agricultural boom. Cotton prices rose from 8.5 cents to 35.9 cents per pound and wheat rose from 97 cents to $2.73 per bushel. However, inflation became a serious problem. Between 1914 and 1920 the cost of living index increased from 100 to 200.

When the United States entered the war in 1917, the economy had to be mobilized. This meant a sudden and considerable increase in government activity and a shift from peacetime to wartime production. Mobilization went reasonably well and the United States was able to orchestrate its role in the war without disturbing economic growth or stability. Under authority provided by Congress the government created several special boards to administer the war effort. The most important of these was the War Industries Board, which had the power to control industrial production. It could determine priorities, fix prices, and even take over factories. Other boards with similar powers included the Food Administration, the Fuel Administration, the Shipping Board, and the Railroad Administration (which actually took over the railroads until the end of the war).

The increased needs of the wartime economy created a greater demand for labor at the very same time that the number of available workers declined. This was caused by a decrease in immigration, coupled with the fact that nearly four million men enlisted in military service. The overall effect of this worker shortage was to strengthen the position of labor. Wages rose significantly, from an index of 100 in 1913 to 234 by 1920. Labor unions also benefited—membership rose from 2.77 million in 1916 to 4.12 million in 1919. In addition, the government created the War Labor Board to settle disputes between workers and employers.

The United States financed as well as fought in the war by loaning the Allies more than $10 billion. In order to cover its expenses the U.S. government resorted to a dual strategy: one-third of the cost of the war was funded through tax revenue, and the remaining two-thirds was financed through loans. Most of the loan money was generated through the sale of Liberty Bonds—in five issues the government raised $25 billion. Additionally there were tax increases on liquor and tobacco, luxuries, and "excess" profits. Taxes rose from $735 million in 1914 to $4.64 billion in 1919. In some income tax brackets the tax rose as high as 70 percent.

Economic expansion during the war had long-term effects. In industries like coal, textiles, agriculture, and shipbuilding, expansion extended production capacity far beyond what the nation's postwar economy demanded or could support. Thus key industries were permanently weakened. Moreover sudden wage deflation after the war set the stage for major labor disputes and the opening of a new and turbulent era.

See also: Federal Reserve Act, Lever Food Control Act, Model T, War Industries Board, World War I