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  • The American Revolution and the New Country: American History, 1755-1790

    The American Revolution and the New Country: American History, 1755-1790

     

    The Causes of the American Revolution

    How the Colonials Won

    Creating a New Nation

     

    Prologue:  America on the Brink of Revolution

    America in 1775 was a very different English colony than in 1700. In 1700, America was a poor “country” compared to England. By 1775, America’s total output was about 40% of England’s. About one-third of England’s total trade (imports plus exports) was with the American colonies. America’s total output and population were growing faster than England’s.

    Besides providing raw material imports that England taxed and exported to other countries, primarily tobacco, America was becoming an important market for English manufactured goods. America also provided ships, shipbuilding, and sailors augmented the British merchant marine in times of peace and the English navy in times of war. About one-fourth of England’s merchant marine was American.

    But England had to be careful. Again, America was a very different colony in 1775 than in 1700. Its population was greater and more diverse. In 1700, almost all the white population in the 1600s came from England. But in the 1700s, about half of immigrants from England were convicts forced to serve long indenture terms in the American colony. German immigrants had no personal or nostalgic ties to England. Many Scot immigrants had good reasons to hate the English. Descendants of Puritans would fight against the French-Canadian Catholics but many had no love-lost for English kings.

    North America was an English colony but it was not primarily a colony of Englishmen.

    American grievances did not just begin after the French and Indian War. There were periods of conflict throughout the colonial period that should have been a warning to England. Americans appreciated the economic advantages of being inside the British imperial system but objected to earlier English attempts to impose stricter political control.

    The French and Indian War, 1755-1761

     

    History is irony. Things turn out differently than expected or planned, there are unintended consequences, a short-run success can be the source of a long-run failure.

     

    The French and Indian War (1755-1761) is an example. England, with help from American militias, won the war. But, as a consequence of the war, England changed its policies towards its American colony. And lost America.

     

    The loss of the American colonies was more important than the gain of Canada.

     

    The French and Indian War was part of a global conflict between England and France. After England’s victory in North America, they made bad decisions affecting their American colonies. From being an ally, Americans became increasingly angry at English policies. The result was that only twelve years after the official end of the French and Indian War (1763), Americans rose up in revolt against English rule. The American Revolution was on.

    Fighting broke out between English soldiers and their American allies on the one side and French Canadians and their Native American allies on the other in 1755. Americans, especially from New England, fought with the British army against the French Canadians and their Native American allies. American colonists contributed many troops and much material support. Thousands of Americans died or were wounded. 

     

    The first shots of the war were probably fired by the Virginia militia on a recon mission scouting the French fort in what is now Pittsburgh. The commander of the Virginians was Colonel George Washington.

     

    This conflict then became part of the Seven Years War (1756-1763), a global conflict between England and France. This war was fought in Europe, India, the Caribbean, and North America. It ended in victory for the English; England took over French Canada and French territory in the upper Ohio Valley.

    A common enemy had been eliminated. Both England and Americans began to reassess their expectations and relationship.

    America and England After Victory

    By helping to defeat French Canada, Americans expected advantages. French forts west of the Appalachians were eliminated. French support of Native American raids on frontier farms and villages ceased. Americans expected that land between the Appalachians and the Mississippi River would now be open to American settlement. They expected protection from Native Americans from English forts and English troops.


    But England had a problem. England had been fighting a series of expensive wars against France since 1689. The English government was deeply in debt. England’s population was being heavily taxed. Americans set their own domestic taxation rates, which were typically less than 1/4 the average tax rate in England. In some colonies, far less. England was hesitant to spend money protecting their American colonists.


    On the contrary. An economically-growing, increasingly wealthy America looked like a good source of new tax revenue.


    England was now a global imperial power, ruling part of India, much of the West Indies, and much of North America. But England had a problem. The war, like the prior three, had been long and very expensive. Taxes were greatly increased at home and the government’s debt went way up. England’s government had to issue new bonds and pay interest to the bondholders. The government of George III looked around for new sources of revenue.

     

    England had another problem. It had to leave troops in North America to protect Americans along the frontier from Native American attacks, to occupy Canada, and to garrison the former French forts west of the Appalachian Mountains. The Native American tribes west of the Appalachians had fought with France. Conflicts with Native American tribes broke out right after the war ended. American farmers, plantation owners, and land speculators started to move west into former French territory. British commanders estimated it would take about 10,000 troops and £350,000 a year to man the forts and keep the colonists and Native Americans separated.


     

    To minimize English military expenditures and try to avoid warfare with the Native Americans, the English government decreed that Americans had to stay out of the new territory (all territory west of the Appalachian Mountains, which were effectively the western border of the colonies). Nothing could have dissolved American goodwill towards England faster. Pride in being part of England’s victory quickly turned to anger. Americans believed that access to free or cheap new lands was part of their birthright. Many Americans, especially in New England and along the frontier, saw the new lands west of the Appalachians as an opportunity to own farmland and be independent.

     

    As if this weren’t enough, England decided it was time to bring its American colonies under stricter English control. Their policy of “salutary neglect” of over 150 years was at an end. English warships patrolled American waters to capture American smugglers. English officials were sent to America to enforce the Navigation Acts and collect tariffs (taxes on imports) and taxes. All governors had to be appointed by London; before, some had been elected by provincial voters. They answered to English government directives. 

     

    England also felt that Americans benefited from the war and should help pay for it. So the English government passed a series of laws increasing already high tariffs on imported American tobacco and imposing new taxes on their American colonies. Americans were not accustomed to paying taxes, except the low local taxes they voted on themselves. Every time England imposed a new tax, howls of protest went up in America. Then Parliament would repeal (cancel) the tax and try a different one. That just made the Americans angrier. Protests became larger and better organized. Americans from the different colonies set up a correspondence network to share information and coordinate strategies. Local opposition groups called “Sons of Liberty” were formed. Some Americans began talking about their rights as Englishmen, shifting the opposition from new taxes to abstract rights. This is always dangerous. Shouts of “no taxation” became “no taxation without representation,” meaning Americans shouldn’t pay taxes unless they voted for the taxes themselves or were represented in Parliament. This was not going to happen since most Englishmen were not represented in Parliament.

    Tea 

    And then came tea. Americans imported tea from the English East India Company, which had a monopoly to buy and distribute Chinese and Indian tea throughout the British Empire. The East India Company sold tea to English and American distributors and exporters in England. But in the early 1770s, the company had warehouses full of tea in England they couldn’t sell. One reason they couldn’t sell enough tea in England was because there was a very high tariff (tax) on imported tea and some of it was smuggled in without paying the tariff. For English consumers, the smugglers’ tea was cheaper.

     

    So the East India Company decided to sell tea directly to the American colonies, bypassing the wholesalers and merchants. They would bring tea to America in their own ships and sell tea directly to Americans at a lower price. They believed that, even with the tariff on tea, this would reduce the price of tea to American consumers and American tea drinkers would buy more.

     

    Everyone focused on the tariff, not the lower price. Another colony-wide boycott was begun. As East India Company ships arrived at American ports, local mobs (or protest groups) blocked the unloading of the tea. In Boston, a mob boarded a ship and dumped the tea into the harbor. This was the final straw for the frustrated English. The damned colonists were destroying English private property! 

     

    Boston was singled out for harsh punishment. English soldiers were sent to seize Boston, close the port, suspend elected governments, and close the courts. In short, martial law was declared. The head of the English army in North America, General Gage, had total authority. This was probably unexpected. In the past, England always backed down in the face of organized protests and boycotts. Worse yet, English soldiers killed five Americans in the so-called “Boston Massacre.”

     

    New England Puritans, who had little patriotic feelings for English kings anyway (many supported the beheading of an English king by English Puritans during the English Civil War), increased organized protest and boycotts, and stepped up the size and training of local militias. Weapons and gunpower were stockpiled. Anti-British propaganda, most notably from Sam Adams, became more critical. Puritan ministers began denouncing English actions from their pulpits. Once more, New Englanders strengthened their ties with sympathetic groups throughout the colonies. 

     

    1775

     

    War was not inevitable.

     

    The Boston Tea Party happened in December 1773. The first shots of the Revolution were fired in April 1775. Still, the war could have been avoided. It was more than a year later before the Continental Congress declared independence from England. Until it happened, most Americans did not want a break with England. Many Americans had personal and families ties with England. Wealthy Americans sent their sons to schools in England. Until the very end, most members of the Continental Congress tried to avoid a break with England. But King George and his cabinet were in no mood to negotiate. As far as King George was concerned, the damned colonists were there to be milked like cows, not real or proper Englishmen.

     

    Until 1775, almost all Americans did not think of themselves as Americans (except Sam Adams). Many, especially the political and economic elite, thought of themselves as Englishmen with all the historic rights of Englishmen. Others identified with different religious, language, and ethnic groups. If anything, most of the white population identified with their own colony. Before 1775 (and after the Revolution), it was common for someone in a colony or state to refer to people from other colonies or states as “aliens.”

     

    How did the Americans win the Revolution? 

     

    Before the war began

     

    Most textbooks tell the story as a David vs. Goliath contest. On paper, the English should have won easily. They were a world power. They had a professional, well-trained, experienced army, considered one of the best in the world. England also had a large and powerful navy. It had proven during the last war that military forces in America could be supplied by the British navy and merchant marine from England. England was not at war with France, so it could concentrate its military might on America.

     

    Many of its officers and soldiers had fought in North America during the recent French and Indian War. They had fought alongside American militia units. General Gage had been the commander of British forces in America for 12 years. His wife was American. He owned property in America. America was not a foreign territory. 

     

    If this were a traditional war fought in the traditional European manner, England would have won. But it mostly wasn’t. It was something new. And something modern – grassroots political organization, a vigorous propaganda campaign emphasizing rights, guerrilla warfare, wearing down the will of the occupying country until they decided the cost of trying to stay was too high. I found it amazing in the 1960s that America’s strategic and military planners didn’t see the analogy between a massive American commitment in Vietnam and the massive English commitment at the start of the American Revolution. 

     

    Each colony was separate and different until years of colony-wide protests and boycotts promoted some cooperation. Political networks throughout the colonies had been established. Local protest leaders and organizers corresponded with similar leaders elsewhere (Americans, like the English, were prolific letter writers.)

     

    Public opinion shifted quickly in 1775 and 1776 as England cracked down on Boston. The rhetoric of the English government was belligerent and showed no signs of wanting to negotiate differences or grievances. In the colonies, the change in sentiment towards independence accelerated with the publication of Tom Paine’s Common Sense in early 1775. His short book was an instant best-seller. It was read aloud and debated throughout America (often in taverns). It was a brilliant and effective piece of political propaganda. It set out in plain language how England had a tyrannical government, oppressed Americans, and why America should be free of English rule.

     

    Organized protests and boycotts against tea and other English imports evolved into organization for independence. Local “patriotic” groups like the Committees of Safety, seized local (county) governments and local militias. They demanded that everyone sign a loyalty oath to support American independence. Local Tories (supporters of England) were harassed, humiliated, shunned, attacked, driven from their homes, and occasionally killed. The most politically-active rebels had seized the initiative and silenced active and potential opposition.

     

    The story of American farmers putting down their plows and taking up their guns to fight the British had some truth, especially in the first months of the war, but is not the whole story. Americans were not quite the untrained and unorganized military amateurs pictured here. Most were already members of local militias, whose training became more serious as the war approached. Many American officers and soldiers had fought in the French and Indian War. Since they fought as detachments of the regular British army, they knew how British officers thought and the strengths and weaknesses of British soldiers. Many future American generals saw combat in the earlier war, including George Washington, Israel Putnam, Philip Schuyler (future father-in-law of Alexander Hamilton), Benedict Arnold, and Daniel Morgan. Two other American generals, Charles Lee and Horatio Gates, had been officers in the English army. Ethen Allen was part of the joint force that captured Fort Ticonderoga from the French. He returned 16 years later, along with Continental Army troops under Benedict Arnold, to take it away from the English.

     

    Americans had “home court advantage.” They knew the geography. The American colonies were a large area of about 100,000 square miles, larger than the English isles. Much of it was wilderness or sparsely populated. Poor roads. A logistics nightmare. There was no way English forces could occupy this much territory.

     

    Besides the “home court advantage,” the Americans had a psychological advantage. After the fighting began and King George made it clear there would be no negotiations, the Americans knew their only choices were to lose the war and suffer under harsher English rule (and the leaders would be hung as traitors) or be independent. And Americans were motivated by a radical new ideology of liberty and equality. They knew the potential advantages of self-rule under their own national government. To paraphrase Tom Paine, England might be able to defeat an American army, but they could never conquer the country. And there were armed rebels everywhere.

     

    Winning the war

     

    In England, there were groups that supported American independence or favored negotiating differences. They included Adam Smith, political and philosophical liberals, Edmund Burke, manufacturers, merchants, and William Pitt, the former English prime minister who devised the brilliant strategy that won the Seven Years War. But these groups had little political power and were ignored by King George and his ministers. But they persisted and their opposition grew as the war dragged on.

     

    After the battle of Bunker Hill (June 1775),  fought by local militias, the Americans realized they needed a permanent standing army. They could not continue to fight the British with part-time militias. So they formed the Continental Army under the command of George Washington.

    General Washington, when he assumed command of the new Continental Army around Boston, proposed a toast at an officers’ dinner. He hoped for a short war. But Israel Putnam, one of his three generals, countered with “I expect nothing but a long war, and I would have it a moderate one, that we may hold out till the mother country becomes willing to cast us off forever.” Putnam seemed to understand that a long, indecisive war would ground down the will of the more powerful England and promote American nationalist feeling and cooperation.

     

    After being forced to evacuate Boston the following spring, because of the surrounding guns the Americans brought down from Fort Ticonderoga. the English government decided on a major commitment of English forces to occupy the colonies and punish the rebels. The obvious first target was New York City. Both sides believed that controlling the port of New York was key. In the spring of 1776, the British sent over about half of their regular army and over half of their navy. In the battle of New York, the Brits routed Washington’s Continental Army, drove the remnants across the Hudson River, and pursued the Americans as they retreated through New Jersey and Pennsylvania. Lord Cornwallis’ cavalry almost caught them. Later, in Washington’s most daring move of the war, his small army crossed the Delaware River, caught England’s Hessian mercenaries napping (drunk) in Trenton, drove north to capture Princeton, and once more eluded Cornwallis.

     

    In September/October 1777, the Americans won the most important victory of the war. They defeated a large English army at Saratoga, New York. The battlefield American commanders, who were most responsible for the victory, were Benedict Arnold and Daniel Morgan, under the overall command of Horatio Gates. The English strategy of controlling the Hudson River area and isolating New England failed. But just as important, the American victory (and Benjamin Franklin’s brilliant diplomacy in France) convinced the French to support the rebels. England was now at war with France again, not just with the American rebels.

    This was crucial for another reason besides French support of the Americans. England now had to commit forces to protect their valuable West Indies sugar islands and Gibraltar. Both were consider crucial; this lessened the necessity of conquering America. 

     

    Over the next three years, England won battlefield victories but didn’t annihilate the Continental Army or convince the rebels to give up. The Brits occupied Philadelphia after defeating Washington’s troops, but were overextended and evacuated its army later. George Washington, who started with the conventional belief that you won wars by winning battles, began to realize that the goal of winning independence was avoiding defeat and keeping the Continental Army together.

     

    On the other side, after Saratoga, the Brits had all but given up the idea of militarily conquering America. About 8,000 British soldiers and ships were assigned elsewhere, mostly to the West Indies to protect the sugar islands from the French. General Clinton, the commander of English forces, knew that his diminished forces could not conquer America and that England would probably eventually leave.

     

    By 1780, France had made a major commitment in arms and money. A large force landed in New England and preliminary discussions with Washington about joint operations began.

     

    At about the same time, Clinton and Lord Cornwallis decided on one last attempt at offensive action. They thought if they could conquer the southern colonies, they could at least keep them separate from the other colonies. Starting with the assumption that there was widespread southern support for England, an illusion the Committees of Safety had destroyed years earlier, Cornwallis was to lead a large part of the English army through the South, rally local support, and defeat the Continental Army units sent to oppose him.

     

    They started by occupying Savannah and Charles Town. Using Charles Town as a base, Cornwallis marched his army north, mostly through wild “backcountry” territory. It was a slow-moving disaster. He was constantly ambushed and harassed by the highly-effective guerrilla tactics of local militias under Frances Marion and a detachment of mobile Virginian cavalry and infantry under Henry “Light Horse Harry” Lee (father of Robert E. Lee). Frustrated and unable to engage the main Continental Army force under Nathanael Greene, Cornwallis approved a terrorist campaign by his ruthless cavalry commander, Colonel Banastre Tarleton, to intimidate the locals (the basis of the Mel Gibson movie, The Patriot). It had the opposite effect. Angry local militias and state troops rallied to the side of the Continental Army; Daniel Morgan came out of retirement. After a campaign of small-scale encounters, Morgan and Greene decided on a battle at a place called Cowpens. Morgan adopted a daring, unorthodox strategy based on his understanding of Tarleton’s aggressive, rash personality. After inflicting heavy losses on the English, especially Tarleton’s forces, the Americans withdrew. Cornwallis continued his pursuit, fought further small engagements but couldn’t force a decisive battle with the elusive Greene. Green’s strategy was fight and retreat. Grind down Cornwallis’ army. It worked; Cornwallis’ army was reduced in numbers and effectiveness, exhausted, and riven with malaria. He headed for Yorktown, Virginia, dug in, and sent a message to Clinton asking for the British navy to rescue his army.   

     

    This created a dilemma for Washington. Washington always hoped that someday his forces would be strong enough to attack the English stronghold of New York and remove the personal disgrace of his earlier loss. Most of the Continental Army was deployed in a ring around New York. With French support, he felt the time had come. But Rochambeau, the French army commander and deGrasse, the French naval commander, were against attacking the main English force in New York. Yorktown appeared as an alternative. Washington reluctantly agreed and the combined force marched and sailed south.

     

    Luck was with the Americans and the French. Clinton had sent a fleet to evacuate Cornwallis and his army. But a French fleet under de Grasse, sailing north from the West Indies, arrived just in the nick of time and fought off the English fleet, which returned to New York. The Americans and French started a classic siege, moving closer and closer to British defensive positions. American and French artillery pounded the English. Finally, Colonel Alexander Hamilton stormed a key English redoubt (strong defensive position) and took it. English defenses crumbled. Cornwallis and his army surrendered.

     

    It was over. The war had been long, expensive, and indecisive for England. England’s national debt doubled. Over 2,000 English merchant ships were captured or sunk by American privateers. Opposition to the war in England was growing. Everyone in the English government, except King George, knew it was time to negotiate a treaty.

     

    Approximately 25,000 men died on both sides. England could absorb this loss and continue to be a world power. About 50,000 Americans left for Nova Scotia and England. Including Benedict Arnold.

     

    Independent America

     

    The American rebels had won the war, but America was not a country.

     

    There was almost no central (federal) government. The Confederation government had stopped functioning.

     

    As during the war, the federal government could not tax the people to raise revenue.

     

    The currency, named the Continental, was worthless. There was no gold or silver to mint coins.

     

    With England gone, governments in the separate colonies no longer had any strong reasons to cooperate with each other. There were border disputes. Slavery was an issue. Northern states had begun to move against slavery. Southern states didn’t.

     

    There was no way to resolve conflicts between states.

     

    America was no longer within the British imperial trading system. Exports fell. Planters in Virginia and South Carolina suffered. As did port cities. There was a general recession.

     

    English troops continued to man former French forts in the interior, contrary to the treaty agreement.

     

    France withdrew its soldiers and financial support. France still claimed much of the land beyond the Appalachians.

     

    The army had been disbanded. Having been occupied by the English army, no one was in favor of a permanent standing army to defend the new country.

     

    George Washington retired to his plantation.

     

    There was renewed fighting with Native Americans along the frontier and in the new territories. 

     

    A small group of the Revolution leaders found this state of affairs intolerable. They decided to do something about it. The result was the Constitution.

     

    There was some doubt about whether the members of the Constitutional Convention had a legal mandate to write an entirely new federal constitution. But the 55 delegates at the Constitutional Convention including George Washington, James Madison, Benjamin Franklin, and Alexander Hamilton. John Adams was absent because he was America’s ambassador to Great Britain, but he had input through correspondence with delegates. 

     

    The Constitution they created was an extraordinary document. No other democracy or republic in history, not Athens, Rome, or England, had a written constitution. After much debate and compromise, the Constitution set up the structure of the new government, the responsibilities of different branches of government, and how power and responsibilities were to be distributed. The power of the judiciary was vague but later John Marshall vigorously expanded the power of the Supreme Court.

     

    Abolishing or limiting slavery was discussed at the Convention. The delegates from the Southern states pointed out that if the Constitution abolished slavery, the Southern states would reject the Constitution and ratification (approval) would fail.

     

    After the Constitution was written and sent to the states for ratification, it was opposed by many people with good revolutionary credentials. Thomas Jefferson opposed it (he was in France as America’s ambassador) but was convinced to remain neutral after a very long correspondence with his friend James Madison (who wrote the first draft of the Constitution). Opponents included Patrick Henry. John Hancock opposed it for a long time but in the end reluctantly supported it, ensuring Massachusetts’ ratification.

     

    The Constitution narrowly passed but only after Madison and other backers promised to support amendments that limited the powers of the new federal government. Madison kept his promise. As the first Speaker of the House of Representatives, he wrote the amendments and saw they were passed. These amendments became the Bill of Rights. Later, Madison joined Jefferson as a strong advocate of states’ rights. Some of their arguments were later used by southern states to defend slavery and defy federal laws. (Some of these arguments are still used today; America has never resolved this conflict between states rights and federal laws.)

     

    After the government was established in 1789, political leaders like Jefferson and Hamilton debated America’s future and what role the federal government would play in it.

     

    America in 1790:  The First Census

     

    The census of 1790 counted approximately 3,900,000 people. Over 3 million were white Europeans and their descendants. About 700,000 were slaves, 18% of the total population. This was the highest percent recorded in any census. Over 100,000 Americans had already moved beyond the state borders into what was called the Western Territories, land on the other side of the Appalachian Mountains.

    America continued to have one of the highest birth rates and population growth rates ever recorded. America had a young, rapidly growing population. There were as many whites under the age of 16 as 16 and over. A dynamic, young population began to move west, a mix of independent “freehold” farmers and slave-owning planters. 

     ======================================================

    View the Ken Burns documentary The American Revolution. But be prepared – it’s 12 hours long. Until it is aired again on PBS, you can watch it on your phone with the PBS app. Or buy the series on Amazon Prime.

    See the next post in this series, A New Nation:  America From 1789 to 1860


    For a list of all essays with links, see 


    List of Posts by Topic.


    There are more posts on American History and American Economic History. Essays that provide context to these American history essays –  America position in England’s rise to becoming a world power. Essays on information, innovation, and how markets work. Essays on business, finance and economics. A series of essays on demographics, population projections, and speculations on how decreasing and aging populations will interact with the economics of individual countries and the global economy.

     


     

  • A New Nation: America from 1789 to 1860

    A New Nation: America from 1789 to 1860

     

    Earliest known photograph of slaves and cotton, around 1850
    Brigit Katz, Smithsonian Magazine, December 6, 2019

    A New Nation, America from 1789 to 1860

    If you study American history from 1789 to 1860 (just before the start of the Civil War), the political history is very complicated. But remember what caused most of these political conflicts and uneasy compromises – the dynamic changes in the underlying economy. Two in particular – the spectacular increase in slave-produced cotton and the beginning of the Industrial Revolution. They were related.

     

    What is the Industrial Revolution? At its heart it is power-driven metal machinery producing huge quantities of goods. At first, the power was supplied by steam engines and water wheels. Later, in the 20th century, electricity. All of this used huge amounts of fossil fuels – first coal, later oil and natural gas were added. America had huge quantities of all three.

     

    A trend that continued from colonial times was the rapid population growth of America. This is part of demographics, the study of populations. America has had spectacular population growth throughout its history, from 4 million people in 1790 to 30 million in 1860 to over 330 million today. Two reasons for this growth were high birth rates, and open immigration until 1924. Also, Americans tended to be healthier than the people in other countries, mostly because of plentiful food. This is an important part of the American story, as discussed in the essay on colonial history. 

     

    There are lots of numbers when you talk about demographics, economic growth, and the Industrial Revolution. I’ll try to keep them to a minimum, hopefully just the more important ones. I also round up numbers to make them easier to read.

     

    The New Government, 1789-1798 

    After the Constitution was ratified and the structure of the new government was established, Americans voted in their first elected representatives in 1789. George Washington was elected president. He appointed Thomas Jefferson as Secretary of State (in charge of foreign affairs) and Alexander Hamilton as Secretary of the Treasury (financial affairs). James Madison, who wrote the first draft of the Constitution, became Speaker of the House of Representatives and established the structure and procedures in the House that are still used today.

     

    The government faced many of the problems left over from the Revolution. Because of the fight with the British army, Americans did not want a large standing (permanent) army.  They saw a permanent army as a threat to their liberties. America could do this because there was no serious threat on the American continent. Also, they didn’t want to get involved in European wars and political conflicts. “No entangling alliances” as Washington said. This foreign policy was possible because America was separated from Europe by the 3,000 miles of the Atlantic Ocean. 

     

    This was not to be. What happened in Europe during this period would have a profound impact on American history.

     

    The same year the U.S. government began, the French Revolution broke out. The French revolutionaries used similar ideas as the Americans. They wanted to destroy the power of the French king and the aristocracy. In 1793, they beheaded the king and queen of France and thousands of others. The other countries of Europe – all with kings or queens – were appalled. They declared war on France. One of the countries was England. England would fight France, off and on, until 1815.

     

    France was taken over by Napoleon. He would fight until he eventually lost in 1815. Wars are expensive and Napoleon needed money. France had laid claim to part of America. But Napoleon, fighting large wars in Europe, knew he could not defend the land from west-moving Americans. In 1803, he offered the land to America. President Jefferson bought it for $11 million. It was called the Louisiana Purchase. It was the land between the Mississippi River and the Rockies. It doubled the size of the United States. 


    After Jefferson bought the Louisiana Purchase, he established the Corps of Discovery to find out the geography of what he bought. The Corps first leaders were Meriwether Lewis (Jefferson’s secretary) and William Clark. Their famous expedition of 1804-06 traveled through the northern part of the new territory, including exploring the Missouri River. This was important for the future. America had more miles of navigable rivers than any other country. With the invention of the steamship, America had a vast internal transportation system that would help join the regional economies of the country together. Unfortunately, one of the region’s economy was based on slavery.

     

    Hamilton and Financing the Government 

    All governments must raise money to pay for government activities. But the U.S. government was limited in how it could raise money. The Constitution said the government could not tax American exports. No income taxes. The attempt to put a tax on goods, especially whiskey, led to riots and demonstrations that threatened the new government. What was left? Some revenue came in from land sales but not enough. Hamilton was given the task to solve this problem.

     

    He was ready. He started life as a teenager working for a merchant in the Caribbean. After the Revolution, he spent years studying the history and workings of government finance. His options were limited but he came up with a brilliant (and controversial) plan. He would tax imports.

     

    There was a larger problem. The currency issued during the Revolution (called Continentals) was worthless. The new government had to establish creditability which included faith in any new currency. Hamilton’s idea was to buy back the Continentals at face value. In exchange, the government would issue government bonds that paid interest and could be redeemed (sold back to the government) in the future. The bonds could also be traded like money. How to pay for them? From the revenue that came from taxing imports. Hamilton figured that tariffs on imports would cover government expenses and the cost of redeeming the bonds. He was right.

     

    I believe this was part of a larger plan he had. Hamilton saw the beginnings of the Industrial Revolution. He believed that manufacturing would be part of an economically strong country, as was beginning to happen in England.

     

    In 1791, Hamilton helped found the Society for Establishing Useful Manufactures (S.U.M.), to harness the waterfall energy of the the Great Falls of the Passaic River. The society founded Paterson, New Jersey, which became an early site of the industrial revolution in America. The Great Falls would provide tremendous energy to drive many large water wheels that powered machinery. Paterson was America’s first industrial city and would be a major manufacturing center for over 150 years.

     

    Hamilton’s grand plan:

    ·      Tax imports to raise revenue for the American government.

    ·      Develop domestic manufacturing to produce substitutes for English manufactured goods exported to America.

    ·      Use manufacturing to drive American economic development and growth in addition to agriculture.

    ·      Develop a class of manufacturers, bankers, and merchants.

     

    Hamilton’s vision was bitterly opposed by Jefferson and most Americans who thought about America’s future. Jefferson, when he was ambassador to France, saw the negative side of the beginnings of the Industrial Revolution in France and England. Dirty, crowded cities. Pollution. A degraded industrial labor force. Banking and finance. He saw all of this as a threat to a democracy based on independent, land-owning farmers.

     

    These two different visions of the future would be the basis of later bitter political conflicts.

     

    Slavery and Cotton

    The issue of slavery was mostly ignored at the national level in the early years. It was left to the individual states.

     

    Some people like Jefferson hoped that slavery would be unprofitable and wither away. This was not entirely wishful thinking.

     

    Importing slaves became illegal at the end of 1807. The Virginia and Maryland tobacco industry, the largest user of slaves, was in permanent decline after the American Revolution. Planters turned to diversified agriculture, including grain crops like wheat and fruit orchards. It was not obvious that the same number of slaves were needed or that owning and supporting slaves was profitable in the new environment. All this changed with the English demand for cotton. The deep south had a huge area of some of the best cotton land in the world. Many Virginia and Maryland tobacco planters, who owned half the slaves in America in 1790, moved to the deep south, bringing their slaves with them. Other slave owners sold some of their slaves, who were transported down the Mississippi River and sold to the cotton growers. This is where the phrase “sold down the river” came from. 

     

    It is one of the great ironies of history that the beginning of the Industrial Revolution in England was responsible for the survival and expansion of slavery in America. The first large industry in England was the power-driven mechanical production of cotton cloth. This created a huge and growing demand for cotton. Production of cotton cloth exploded after the war with French ended in 1815. It turned out that the largest and best growing area for the type of cotton that was best for machine production was in the American South.

     

    Cotton Production, 1790-1860

    Small amounts of cotton had been planted and cultivated in the United States since before the American Revolution, mostly in the islands off the coast of South Carolina and Georgia. But there was a bottleneck to the rapid expansion of cotton growing. After the cotton was picked, the fibers had to be separated from the seeds. This was done by hand. Only about one pound of clean cotton could be produced per day. But, in 1793, a Connecticut mechanic name Eli Whitney was invited by a Yale classmate to visit his mother, Nathanael Greene’s widow in Georgia. He listened to the complaints of the local cotton growers. After tinkering for a few weeks, he invented an improved cotton gin. This was a fairly simple, hand-operated machine that could produce about seven pounds of cotton per day. Further improvements increased output to about 50 pounds per day. By 1860, there were large power-driven cotton ginning factories.

     

    Cotton planting expanded to the west very dramatically after 1815—all the way to Texas. Planters, growers, and slaves moved from the Eastern Seaboard throughout the South and then to the Mississippi River region. Planters who owned slaves took them with them, thus avoiding the largest cost of starting a large cotton plantation. 

     

    The growth in cotton production was spectacular. Only about 1.5 million pounds were produced in 1790. Then, after the invention of Whitney’s cotton gin, output increased to 85 million pounds in 1810. By 1840, output rose to 830 million pounds, 10 times that of 1810. In 1860, the South produced the largest crop ever – over 2 billion pounds. 

     

    It was by far the nation’s main export, accounting for about 60% of the value of total American exports. Cotton exports helped pay for the imports of machinery and iron rails. 


    The South was producing about 2/3 of the world’s supply of cotton. 

     

    What led to an expansion of slavery was the unexpected huge increase in demand for cotton, first in England and then in the cotton mills of New England. Cotton was grown elsewhere but nowhere could a growing region produce the large and rapidly increasing amount of the type of cotton that manufactures demanded. This was made possible by the large increase in the slave population through natural increase, even after importing slaves was banned. By 1860, a very high percent of the slave population was growing, processing, and distributing cotton.

     

    Railroads, 1830-1860

    Starting in the 1830s, America built a large railroad network.

     

    America began building railroads in the 1830s, right after England built the first general-purpose railroad in 1830. By 1850, there was 8,600 miles of track. Then came a railroad-building boom. By 1860, there was 30,800 miles of track. America had by far more miles of track than any other country. New York had the most miles of track, followed by Ohio, Illinois, Pennsylvania, and Indiana. The southern states had about 1/3 of the total trackage.

     

    Railroad locomotives and tracks were a huge spur to iron production and manufacturing. Railroads were able to move large quantities of output (and people) from one region to another. 


    The Key to America’s Early Industrial Success

    America had abundant natural resources and aggressive “go-ahead” entrepreneurs. America also had poor immigrants who would form part of the new industrial work force. But what really drove industrialization was a new way to manufacture output.

    Thomas Jefferson was ambassador to France where he learned about an experiment to manufacture interchangeable parts to produce guns. He brought this idea to America and it was developed in America’s two armories at Springfield, Mass and Harper’s Ferry, Virginia.  It took thirty years to perfect the system.

    Interchangeable parts means that all produced units of a part are almost exactly alike. If a part of the firing mechanism of a gun had to be replaced, any substitute part would fit in without the former necessity of filing it down, fitting it, and repeating the process until it fit. This also meant that a factory could produce large numbers of all the parts and assemble the final product from any one of the parts. This system was be used to revolutionize the production of sewing machines, clocks, other metal products, and later bicycles and autos.

     

    The Economic Integration of the Three Regions

    The three regions of the American economy were becoming economically integrated but politically divided over the issue of slavery. America’s first large industry was also cotton cloth production in New England, with its own demand for Southern cotton. About 75% of Southern cotton was exported and 25% went to New England mills. Much of the cotton cloth output was used to make cheap clothing for slaves. The shoe factories of New England made most of the shoes worn by slaves. Southern families bought home furnishings from Northern factories. In addition, much of the cotton trade was financed by Northern bankers. Most exports went through New York. Southern planters borrowed large amounts of money from Northern bankers to expand production by buying more land and more slaves.

     

    Politicians and commentators debated the future of America. What no one foresaw was that these three parts of the economy of America were going to be connected.

     

    What would tie the three regions together was the transportation revolution, based on high pressure steam engines that drove railroad locomotives and steamboats. Steamboats exploited the largest system of navigable rivers in the world.

     

    Southern railroads and steamships brought cotton to Southern ports. By 1860, there were about 800 steamboats on the Mississippi River. Ships, first sailing ships, later supplemented by steam ships, carried the cotton to New York. Transatlantic ships carried the cotton to England, mostly to Liverpool.

     

    Northern farm families streamed into Ohio, Indiana, and Illinois in search of new farmland. These states had the biggest increase in population between 1850 and 1860. These farmers produced food for the increased population of Eastern cities and for exports. Produce went to market first through canals and then mostly by rail. Beside moving cotton to market, the greatly increase speed and capacity of railroad brought Western grain east and manufactured goods west. The new Western farms also supplied corn and pork to the Southern plantations, much of it sent south on Mississippi steamboats.

     

    By 1860, America had three sources of economic growth:

     

    Expansion of agriculture based on population growth, unlimited land for independent farmers, and westward expansion. 

     

    Expansion of slave-based cotton production. By 1860, Mississippi produced the most cotton, followed by Alabama and Louisiana.

     

    By 1860, the Industrial Revolution in Americas was well on its way. More money was invested in cotton mills than in any other industry. The second largest manufacturing industry was the iron industry.

     

    To the Civil War 

    The issue of slavery was the main cause of most of the political battles during this period, including the annexation of Texas and the war with Mexico to make Texas a slave state. There was a rise of anti-slavery sentiment in the North and West. Arguments were increasingly made for the abolition of slavery. There was effective propaganda, like Harriet Beecher Stowe’s book Uncle Tom’s Cabin. In response, the Southern defense of slavery became fierce – no compromises. Slave ownership and cotton production became the basis of the economy, political power, society, and culture of the South. 

     

    There was a danger to the expansion of cotton production and slavery as more new states in the future would be “free soil” (no slavery) states than new slave states. The South would lose political power in the national government and might be threatened with the abolition of slavery. Arguments on both sides became very emotional. When Abraham Lincoln was elected president in 1860, the South saw him as a threat to the survival of slavery. Although he hated slavery, he did not advocate its elimination. He wanted to stop it spreading to new states. Southern planters believed they needed new land as old cotton lands wore out and produced less cotton per acre. The Civil War – the South’s attempt to leave the union – started even before Lincoln was inaugurated. 

     

    The 1860 Census – the United States on the Eve of the Civil War 

    Total population – 31.4 million

    White population – just under 27 million (86%)

    Slave population – just under 4 million (13%)

    Free blacks – just under 500,000 (1.6%)

           Does not exactly equal 100% because of rounding

     

    Number of whites in the South – 5,800,000. This is the number of whites in the South in states that left the United States in the Civil War.

     

    Number of whites in the North – 21,200,000. This includes slave states that did not leave the Union in the Civil War.

     

    By 1860, despite continuing immigration, most Americans were native-born. Of the 27 million whites, about 4 million were foreign-born. Just under 75% of the immigrants during this period came from Ireland (because of the famine) and the German States (Germany did not become a unified country until 1871). Of the black Americans, almost all were native-born since the Constitution prohibited importing slaves after 1807. 

     

    Remember there were about 700,000 slaves in 1790. Most of the increase came from the high birth rates in the number of slaves.

     

    There were more slaves than whites in Mississippi and South Carolina. Slaves made up at least 40% of the total population in Alabama, Georgia, and Louisiana (almost 50%).

     

    Almost 400,000 white families owned slaves. But most of them were owned by a small percent of the slave-owners. About 280,000 whites owned fewer than 10 slaves. At the other end, about 11,000 whites owned 50 slaves or more; 14 of them owned 500 slaves or more.


    At the beginning of this period, slavery was legal in all 13 colonies. But the ideals of the American Revolution motivated some Americans to think about abolishing slavery. By the end of this period, all northern and western states had outlawed slavery. The arguments for and against slavery became more shrill. Some attempts at compromise, as advocated by Abraham Lincoln, were rejected by the south. The essay cited below argues that the Civil War, unlike the American Revolution, was inevitable. 

    =========================================================

    For two essays on earlier periods of American history, see


    American Colonial History, 1607-1775


    Revolution and the New Country:  American History, 1775-1790

    For an analysis of:  Was the Civil War inevitable?, see 

    The American Civil War

    For an example of the transition from using hand tools to power-driven machinery for production, see

    Adam Smith’s Pin Factory

    For an essay focused on the industrialization of America in the same period, see

    The Beginning of the Industrial Revolution in America

    For an analysis of:  Was the Civil War inevitable?, see The American Civil War


    For a list of all essays on this blog, with links, see 


    List of Posts by Topic


    There are more posts on American History and American Economic History. Also essays on Rome and the period surrounding World War I.

    Essays on information, innovation, and how markets work. 

    Essays on business, finance and economics. 

    A series of essays on demographics, population projections, and speculations on how decreasing and aging populations will interact with the economics of individual countries and the global economy.

     

  • The American Civil War

    The American Civil War

     


     

    INTRODUCTION


    This is not a military history of the American Civil War. Instead, it tries to answer three related questions:

    Was the war inevitable in 1861?

    Could it have been avoided?

    What were the alternatives to war? 



    BACKGROUND


    America has a peculiar political structure. Major decisions such as abortion, gun laws and legalizing drugs are often made by states, not the national government. The Constitution does not say anything about whether slavery should be abolished or remain legal. So slavery would be legal and protected in the major cotton-producing states. Congress could pass a law outlawing slavery but it couldn’t be enforced in the slave states.


    In 1861, southern cotton production was important to the northern economy. Cotton textile production was the largest industry in the north. New York City handled most of the distribution of the cotton crop and much of the financing of exports to Europe. Cotton was also by far America’s largest export. (For more on the economic integration of the three regional economies of the United States, see my post American History, 1790-1860.


    So, in the foreseeable future, slavery was probably safe from legal abolition. But not from criticism and political pressure. There was increased agitation to abolish slavery.


    THE SOUTH’S ECONOMIC POSITION IN 1860


    The South didn’t need new land in new states to produce more cotton, although many southerners didn’t believe it. There was much unused and underutilized land in the existing cotton states. Southern agricultural publications advocated better farming techniques to increase output per acre and use the land more productively.

     

    It was very likely that the high growth rate in the southern production and sale of cotton would slow down. Global demand was already high. One reason the South had spectacular growth rates in the past was that the South could fill the increased demand nationally and globally. Besides more land and the natural increase in the number of slaves, much of the slave population was moved from the upper south, tobacco-growing regions, such as Virginia and Maryland, and the cities and towns in the South to the cotton-growing regions. This internal migration was almost over; there were fewer slaves left in urban areas.


    From an economic point of view, the South would continue to benefit from its dominant position of supplying the type of cotton needed by cotton textile mills. There was room for expansion, but not at the spectacular growth rates in the past. Both supply and demand would probably grow slower. Growing cotton in the South would probably remain profitable. In summary, the South would continue to prosper even with the status quo. 


    Growing cotton was still an expanding and profitable business (see the definitive economic analysis, Robert Fogel’s Time on the Cross).


    1859 saw a record-size cotton crop. The crop in 1860 was even bigger. It was profitable to use slaves to produce more cotton. The South could reasonably expect a continuation of the trend of the natural increase in the number of slaves and growing demand for its cotton, even if future growth rates would be slower than in the past.

     

    THE SOUTH’S POLITICAL FUTURE


    Slavery could only be abolished by a constitutional amendment. This could not happen in 1861 because there were enough slave states to block approval.


    When the South seceded in 1861, there were 34 states. To pass a constitutional amendment abolishing slavery, ¾ of the states, or 26 states, would have to approve the amendment. There were only 19 states without slavery and 15 with, more than the nine states needed to defeat the amendment. Slavery was safe. So why did some of the slave states secede from the union?


    Between 1820 and 1850, politicians crafted compromises to preserve southern political power. The basic tool was that there would be an equal number of slave states and free states, meaning equal representation in the Senate. But continuing western migration of Americans into the Louisiana Territory indicated that most if not all of the new states carved out of the territories would be non-slave states.


    Some southern politicians worried that there would be more “free soil” (no slavery) states in the future. As many as ten new states might be admitted to the Union over the next 20 or 30 years. None of these states would have the natural environment needed to grow cotton. All of them would probably be “free soil” states. Then there would be enough states to pass an anti-slavery amendment.

     

    Even if this didn’t happen, the slave states would have diminishing power at the national level. A southerner would probably not be elected president and the South would have a declining minority of members in Congress in the future. Non-slave states would dictate domestic economic policies and critical tariff policies. They would favor industrialization and the expansion of western agriculture. 


    Slavery might be threatened with legal abolition in 20 or 30 years as more non-slavery states were admitted to the union. Southern states could try to secede in the future but ratio of resources would be even worse. The wide gap between the white population of the North and the South would become even wider. It could not be filled with immigrants. European immigrants were reluctant to go to southern states because good land wasn’t available; large numbers of white southerners, including Abraham Lincoln’s family, were moving out of the South looking for better farmland. Unskilled immigrants would find few jobs because of a lack of industrial jobs and competition from slaves.


    The North would continue to increase industrial and food production, and the railroad network, widening the gap in total output and material needed to fight a war.    


    The South would be at a worse disadvantage in terms of relative resources to fight the war. The South would be more likely to lose a war in 1881 than in 1861.

     

    IF SLAVERY WAS SAFE FROM ABOLITION IN 1861, WHY DID THE SOUTH GO TO WAR?


    If slavery was constitutionally abolished, it was likely that most former slaves would remain in the South as free workers. Cotton production would continue, with former slaves as farm workers or sharecroppers. But this was not certain. In addition, slaves were the largest source of wealth in the South. The total value of slaves was greater than the total value of the land. Slave owners would be much poorer in terms of wealth. Debts incurred in buying and maintaining slaves remained. Equally important, owning slaves provided status and power, particularly to the large slave owners who dominated local politics. Owning slaves and growing cotton were the foundations of the southern society.


    Even if southern slaveowners weren’t looking at longer-run trends, there were immediate reasons to be worried. 


    Political pressure from the North to abolish slavery was getting stronger. Anti-slavery sentiment rose in the 1850s because of the Fugitive Slave Act, the Dred Scott case, publication of Uncle Tom’s Cabin in 1852 (an abolitionist, anti-slavery novel focused on the horrors of slavery and the treatment of human beings as property), the violence in “bleeding” Kansas, and John Brown’s raid on Harpers Ferry to seize guns and presumably start a slave rebellion. In reaction, anger and fear ran high in the South. 


    The trigger of the secession and the war was the election of Abraham Lincoln, representing the new Republican party. Many leaders of the party were abolitionists. 


    Lincoln was personally opposed to slavery. But his political position was that he would leave slavery alone in the existing slave states but that no new states would be admitted as slave states. This was a more moderate position than that of many Republican politicians. Even so, the South saw this as a threat to their expansion, their political power, and possibly their long-run survival as slave states. Southern states began to secede even before Lincoln took office.

     

    WHY DID THE NORTH GO TO WAR?

    More people in the North saw the conflict, and later the war, as a moral crusade, as indicated by the words of the Battle Hymn of the Republic. The conflict between liberty and slavery could no longer be ignored. There would be less chance of negotiations or political compromises than in the past.  


    According to Abraham Lincoln, the North went to war to preserve the Union. In other words, when a state was admitted into the Union, it could not leave. But why not just let the Southern states go? It would greatly weaken the Union. Other states might secede for other reasons. New England states talked about seceding during the War of 1812. There was the danger of the dissolution of the Union. Like during the years right after the Revolution, there would be a very weak national government. It was also feared that the separate states might be at the mercy of European countries. 


    Or each other. There were many disputes among the states before and after the Revolution. They continued. There would be no national mechanism to resolve disputes. States might go to war with each other.


    The United States would now have a powerful new potential enemy along its borders in continental America. The whole point of fighting the Revolution and buying the lands in the Louisiana Purchase was to eliminate threats to the new republic. England, heavily dependent on Southern cotton for its most important industry, might form an alliance with the South. (During the Civil War, many powerful political and economic groups advocated recognizing the Confederacy.)


    The economic integration of the three regional economies of the United States might be weakened or shattered. A Southern government would control the Mississippi River and many of its tributaries. Both countries could put up tariff and other trade barriers against the other. The South might ban the sale of cotton to northern cotton mills. The North could retaliate. 

    Another economic option for an independent South might have been building cotton mills in the South to capture more of the value-added from growing cotton and competing with the northern mills. This began to happen in the 1890s.

     

    ALTERNATIVES

    • ·      Increased national and international pressure.
    • ·      Industrialize.
    • ·      Have the federal government buy out the slaveholders.
    • ·      Free the slaves.


    After the 1880s, the U.S. would have been the only country in the Americas with slavery. Brazil was the other country. But slavery was unprofitable in Brazil as the country moved away from plantation crops. Slavery slowly faded away. This was not possible in South – the whole economy and society depended on one plantation crop produced by slaves. 


    Maybe international pressure could be brought to bear if alternative sources of cotton expanded. But this was unlikely.  The South filled almost of the global demand for their type of cotton, which was the kind used by most cotton mills. Southerners knew the world (and the North) needed their cotton. They were the one-source OPEC of the 19th century.


    Slave owners didn’t even consider any alternative use of slaves. This was outside of their mental framework. South did not consider industrializing or any alternative investment to slaves. Putting up factories was what Yankees did. The whole culture was against it. 


    Another alternative was for the federal government to buy out the slave owners. When England outlawed slavery in all its possessions, it compensated the slave owners in the Caribbean with long-term bonds. The U.S. could have done the same thing except the cost would have been higher. Voters in non-slave states would probably have to pay most of the cost (higher taxes, tariffs, and fees) and might not have been happy about it.


    What would it have cost? There were about 4 million slaves in 1860. The average market value might have been as high as $500/slave. So, the cost was about $2 billion. The market value of the total output of the U.S. in 1860 was about $4 billion. If the government issued bonds, at say 3%, the total yearly interest cost would have been about $60 million. This was higher than the government’s total yearly revenue. And over a long period of time, the government would also have to pay out the $2 billion.  Maybe some of it would come out of higher future tax revenue. But most of it probably from the sale of new bonds. But the United States had a long history of reducing federal debt.


    The South did not consider another alternative. Free their slaves. It was illegal in the South to talk about it or even to possess anti-slavery publications. Both the Methodist and Baptist churches split over the issue of slavery; there was little moral or religious condemnation of slavery in the South. And it was illegal to free slaves in most slave states.


    As it turned out, this is what happened after the Civil War. Ten years later, the South was producing as much cotton without slaves as before the war. But the white landowners could still exploit black labor. How? Many of the former slaves stayed on the plantations and worked for wages. Or sharecropping. There were no local stores. The planters established stores and charged their workers high prices. Most workers went into debt and couldn’t leave the plantations. 

     

    ADDENDUM:  FIGHTING THE WAR TO SAVE SLAVERY


    The South should have learned the main lesson of the American Revolution. The longer the war went on, the better the chance the North would have given up. The South fought mostly a defensive war. But the South’s main general Robert E. Lee was aggressive. He invaded the North in 1863 and lost the battle of Gettysburg. Combined with the loss of Vicksburg, (the North now controlled the Mississippi River and New Orleans, and was in a position to invade the deep South), the war was lost as long as Lincoln was president. But many in the North were appalled at the human cost of the war or were tired of it. Lincoln almost lost the election of 1864 to an opponent willing to discuss the end to the war. The South fought on. Why? Because by then there was little chance for negotiations. More people in the North saw the war as a moral crusade to end slavery. There would be no negotiations or political compromises as in the past. The attitudes hardened on both sides as the war produced huge casualties. Like World War I, it was a war of attrition. It was a fight to the end.  


    The South knew it had two choices – independence (keeping slaves) or being dictated to by the North (abolishing slavery).


    No one thought of the cost of the war. Southerners thought they were going to win the war quickly and preserve slavery. But 200,000 Southerners lost their lives; many more were seriously wounded. Much property was destroyed. (See the movie Gone with the Wind and the burning of Atlanta. In the movie, they burned down the set for King Kong.) The South couldn’t sell cotton to raise money because of the Northern naval blockade during the war. It took over 10 years to recover.

    ===========================================================

    For the background on the contentions in this post, see A New Nation:  America from 1789-1860


    For posts on American colonial and early national history, see

    American Colonial History, 1607-1775


    Revolution and the New Country;  American History, 1775-1790

    For posts on American economic history, see 

    The Beginning of the Industrial Revolution in America

    How America Industrialized and Became Wealthy

    The Stock Market Crash of 1929 and the Great Depression


    Alice in Wonderland and the Origins of Silicon Valley


    For a list of all posts on this blog, see List of Posts by Topic with links to all other posts.




     


     

  • Berkeley in the 60s: A Personal Reminiscence

    Berkeley in the 60s: A Personal Reminiscence

    Berkeley 1962 – 30 students against racial discrimination

    I was mildly political in high school. In 1960, I picketed the Democratic Convention that was in L.A. with a small group of radical Quakers protesting atmospheric testing of atomic weapons. The protest was in front of the Biltmore Hotel, where the candidates were staying. We were outnumbered by federal agents with cameras. After our little protest, I wandered into the Biltmore. While loitering in the main corridor, John Kennedy walked by. He was a few feet away. I didn’t think much about it until his brother was assassinated eight years later in a different Los Angeles hotel. Looking back, I was amazed at the lack of security. A kid in a protest just walks into the hotel – no security at the door, no identity checks, very little security (if any) around Kennedy. I guess all the government agents were too busy developing the film they took of our protest and writing detailed reports on how Quakers were threatening America’s security.


    In high school, I planned to go to Berkeley, as did my liberal friends. I had my life planned. Undergrad major in Poli Sci/International Relations, law school (probably Boalt, Berkeley’s law school), and lawyer in SF (back to LA, if desperate). The Fates laughed.

     

    I graduated high school in Los Angeles a semester early in 1962 and started Berkeley the next week. I was at Berkeley for one semester as an undergrad in Spring 1962 and one semester as a grad student in Spring 1966. I visited friends at Berkeley in the intervening years.

     

    My parents drove me up to Berkeley and dropped me off. I decided to see the campus. It was getting dark and the campus was deserted because of the semester break. A little spooky. All the buildings were dark. But at the top of the hill Berkeley was built on was a large building fully lit up. Everyone working on a Saturday night between semesters? I later asked a friend about it and he laughed. Sort of. He told me that was where Edward Teller and associates designed bigger and better hydrogen bombs.

     

    (A little history for everyone who saw the recent movie about Oppenheimer. Teller helped to design the first atomic bomb at Los Alamos. He was part of a brilliant group of European refugees that came to the United States mostly in the 1930s. When designing the first hydrogen bomb later, he got his fellow Hungarian refugee, John von Neumann, to design and supervise the construction of the first modern computer to solve partial differential equations and thus speed up the development of the bomb.)

     

    In 1962, Berkeley was more an extension of the post-war 1950s than its later image. Rather quiet, laid-back (hey, we’re talking California here), students hanging out. Folk and folk-rock music, early rock and roll. Peter, Paul and Mary gave a free concert. Students optimistic and career-oriented. We recognized the new opportunity that college provided; almost all my high school friends and I were the first in our families to go to college. 

     

    There was little political activity on campus. Some interest in hippie culture. The dominant political cause was the civil rights movement but not much active interest. There wasn’t any civil rights group on campus. A friend and I decided to start one. 

     

    In those days, you had to get permission from the university to set up a table and distribute literature. So these two nebbishes climbed the stairs of a huge admin building called Sproul Hall (Woody Allen stole this scene for one of his movies). We finally found the office. The admin flack-catcher wasn’t in but his secretary was; it was obvious she ran the office. She was a middle-aged white woman who spoke with a southern accent. I figured as soon as we left, she would drop our application into her wastepaper basket. While my friend filled out the form, I talked with her. I mentioned that the group we represented (Southern Christian Leadership Conference) was run by Baptist ministers. I forgot to mention they were black. She immediately approved our application.

     

    Two years later, the campus exploded in a student protest called the Free Speech Movement against the administration’s right to ban political activity on campus it didn’t like, including setting up tables and distributing political information. Thousands of students protested, including a massive sit-in in Sproul Hall. Mass arrests. Eventually, restrictions on student political activity were lifted.

     

    The Free Speech Movement had some unintended consequences. Ronald Reagan was unexpectedly elected governor of California on a platform that he would “clean up the mess in Berkeley.” The local DA who had the students arrested became Reagan’s Attorney General after Reagan became president. The head of the California university system, Clark Kerr, whose office was in Sproul Hall, was fired for being soft on student radicals. The steps leading up to Sproul Hall were later named after one of leaders of the movement.  

     

    Back to 1962. It was the last semester of compulsory ROTC, with weekly drill in uniform. Drill was canceled if it was raining hard or the fields were too wet. The university announced cancellation by ringing the campanile bell. So, at 1 PM on the day of drill, the male student body stopped what they were doing and stared up at the campanile. Campus-wide silence. Sort of like a cargo cult or waiting for divine intervention. I learned a new skill – how to spit-shine shoes.

     

    This was the last semester of NO TUITION in the Cal university system. The administration announced that the next academic year would have a yearly tuition of $100! The announcement triggered the biggest student protest and demonstration of the semester. (Actually, this was a bigger deal than it seems today. Students had part-time and summer jobs that paid $1/hour. So 2 ½ weeks of summer employment now went to pay for tuition rather than room and board.)

     

    There was little interest in Vietnam.

     

    Even in this tranquil setting, it was impossible to avoid politics. Richard Nixon, having lost to Kennedy in 1960, was getting ready to run for governor of California. He was giving “non-political” speeches around the state, including Berkeley. Before he came out of a building to give his outdoor speech, the Cal Prep Band, engaged to whip up enthusiasm for Nixon, played “It Ain’t Necessary So.” The audience went wild. Nixon walked out and thought all the “enthusiasm” was for him. He learned differently as soon as he started to speak.

     

    President Kennedy came to campus and gave a speech to a large audience in the football stadium. I don’t remember what he said except something about his wife riding an elephant in India. Afterwards, a prof in the Poli Sci department, an expert on China, had organized a debate on whether or not the U.S. should be in Vietnam. His opponent was a member of Kennedy’s cabinet. Oxford debating rules – quiet audience, no clapping, no shouting or any other interruptions. After the debate was finished, the audience voted for who they thought made the better argument. Since it was right after Kennedy’s speech, I guessed a majority would vote for Kennedy’s man. I was wrong. Over 90% voted for the critic. I thought that if the Kennedy administration couldn’t sell the policy to a sympathetic group of liberal students right after a Kennedy speech, there might be trouble for Kennedy’s government if involvement lasted a long time or was expanded.

     

    By coincidence, I read Thucydides’ Peloponnesian War later that year. I only wish that America’s political leaders over the last 60 years had read it. 

     

    1966. Back to Berkeley. I had a new plan. Ph.D. in Economics from Berkeley and then teach or work in the SF area. The Fates laughed again.

     

    Some hippie, counter-culture, feel good vibes but, overall, the atmosphere was different than in 1962. Vietnam changed it. Big draft calls began in 1965. Anti-war protests, rallies and demonstrations on campus and at the army induction center in Oakland. Elected student radicals dominated student government. Darker mood. Angrier, more radical rhetoric, much more critical of all aspects of American life. Usual weed but now more LSD and other psychedelic drugs. Ken Kesey and the Grateful Dead in nearby Santa Clara county, now known as Silicon Valley. Dominant music was psychedelic rock. Beatles still popular but they were moving from teeny-bopper (I Want to Hold Your Hand) to psychedelic/political (Sgt. Pepper in 1967). Jefferson Airplane at the Fillmore and The Doors at Whiskey a Go Go, where I celebrated my 21th birthday. I went to the Fillmore twice; i didn’t see Jefferson Airplane but I did see Quicksilver Messenger Service. I think. Memory a little hazy. Saw Grateful Dead earlier.

     

    Berkeley had one of the first large anti-war street demonstrations. Thousands of students. It was broken up by the Alameda County cops. I was in another anti-war street demonstration that summer in Los Angeles. This one was broken up by L.A. cops even though ground rules for the demonstration had been worked out with the city. The protest march took place in Century City, a new development of high-rise corporate buildings next door to Beverly Hills. A very west L.A. young adults crowd. Workers of Beverly Hills, unite!

     

    The war in Vietnam changed everything. Changed the political mood on college campuses and in the country. Even worse was to come after 1966.

     

    Out of all this did not come hippie counter-culture and communes. Or radical politics or a new political party. Or any swerve from America’s technocratic future. The Chancellor of the California university system, Clark Kerr again, was explicit on what his goals were for higher education – to provide college-educated personnel for the growing industries and corporations of California, especially the defense industry. And, I assume, for Dr. Teller’s operation on the hill. He was just too soft on free speech and students’ rights.

     

    His program succeeded, just not quite according to plan. The drug-influenced counter-culture of the Bay area produced a disproportionate percent of America’s top entrepreneurs who developed the new digital technology. Out of all this came Silicon Valley, PARC (the digital office of the future), the Homebrew Computer Club and Steve Jobs. Apple in its early years ran a brilliant commercial equating IBM with Big Brother of 1984. Aired, ironically, during a Super Bowl game. Then Apple became the new IBM. The “permanent revolution” of corporate technological change continued. The vision of PCs for the people, a technological counter-culture, became Microsoft, Intel and later, the advertising behemoths Google and Facebook. The Fates laughed. (For a little more detail on how the SF counter-culture ended up creating America’s technocratic and corporate future, see my Alice in Wonderland and the Origins of Silicon Valley.)

     

    I am not very nostalgic about the 60s. They ended badly. Robert Kennedy and Martin Luther King were assassinated. Richard Nixon was elected president and extended the Vietnam War for four more years. It was possible to see the beginnings of the reactionary “counter-revolution” in the 1970s. It has never stopped.

     

    And yet. It was the beginning of a long period of positive change – end of legal segregation and most discrimination. The changing role of women, maybe the most widespread change in America over the last 60 years. Beginning of the environmental, organic farms and food movement (America’s national commune? Mass-produced organic foods?). Expansion of legal and civil rights to new groups. More opportunity and alternatives. More tolerance.  But there were limits – fierce opposition to gay rights, abortion, and celebration of “diversity.” A new economic elite not entirely made up of white males. Part of the group who thought they were still running America were left behind because of the digital technology revolution and the resulting global economy. They were not happy. 

     

    This complicated, contradictory future was not obvious to me at Berkeley in the 60s.


    ——————————————————————————–

    For a list of all the posts on this blog, see List of Posts by Topic

    with links to all other posts.


    Again, a loosely related bit of California history:


    Alice in Wonderland and the Origins of Silicon Valley

     

     

  • Government Finance 101. Fiscal Policy: Welcome to Alice in Wonderland

    Government Finance 101. Fiscal Policy: Welcome to Alice in Wonderland

    Secretary of the Treasury

    PRELIMINARY SUMMARY OF FISCAL YEAR 2025 BUDGET

     

    The Congressional Budget Office (CBO) made their latest projection in January, 2025. The projected deficit in fiscal year 2025 will be around $1.8 trillion, the difference between about $5.2 trillion in revenue and $7.0 trillion in expenses. Interest on the national debt this year will be around $950 billion, over twice the interest expense in the fiscal year 2021 budget and equal to the defense budget. By 2035, the CBO expects the yearly budget deficit to increase to $2.7 trillion.

     

    Interest expense this year passed budgeted outlays for the military. It is about equal to Medicare, and also to total non-defense discretionary spending.

     

    Leaving aside Social Security and Medicare, interest expense is about 20% of total budget outlays. Interest expense is about half the budget deficit.

     

    The $1.8 trillion budget deficit is 6-7% of total GDP, or approximately 10% of consumer spending. Adding the $1 trillion trade deficit, which is 3-4% of GDP, then a total of $3 trillion, or 10% of GDP, is being financed by these two deficits.

     

    SOME BASIC DEFINITIONS AND A LITTLE DETAIL

     

    Some basic definitions for people in government suffering from political amnesia:

     

    Deficit.  The difference between the federal government’s spending and its revenue in one fiscal year.  The fiscal year starts on October 1. So fiscal year (FY) 2025 started on October 1, 2024. All years in this post are fiscal years. You know right away this is going to be confusing.

    Debt.  Short for national debt or federal debt.  The sum total of all past government yearly deficits minus yearly surpluses.

     

    PROJECTED NATIONAL DEBT

     

    As of June 9, 2025, the national debt was $36.2 trillion. The debt/GDP ratio was 124%. The CBO expects it to increase to $59 trillion by the end of fiscal year 2035. So between now and 2035,

    the national debt will increase by about $23 trillion!


    On August 4, the CBO estimated that the recently passed budget bill will add at least $4 trillion more to the national debt over the next 10 years, more likely $5 trillion.  Beside making the “temporary” 2017 tax cut permanent, the budget bill included large increases in defense spending and spending to deport residents. Next month, however, the CBO will attempt to estimate how much tax revenue the government will earn from increased tariffs. The possible range is about $2-$3 trillion over 10 years. So the net effect is a rather small increase compared to the projected $59 trillion national debt in fiscal year 2035. The big question, however, is whether the tariffs will lead to higher rates of inflation in the short run and a recession in the longer run.


    At some point, buyers of government debt will demand higher interest rates because of higher risk or higher rates of inflation. Higher rates are not factored into CBO debt projections.

     

    If these numbers don’t scare the hell out of you, you are probably Donald Trump or a member of Congress.  

     

    WHO OWNS THE NATIONAL DEBT?

     

    Commentators often say we shouldn’t worry about the national debt because we owe it to ourselves. Well, sort of. 

    The total current (December 2025) national debt $38.4 trillion compared to over $36 trillion in 2024. $28 trillion, or about 80%, is owned domestically. About 20% of the national debt ($7.4 trillion) is owned by…the U.S. government! Mostly Social Security and other trust funds and federal employees’ retirement funds. This percent will probably fall over the next ten years as the trust funds of Social Security and Medicare go to zero. About $4.7 trillion is held by the Fed; the Fed is reducing its holdings. Private American investors and institutions own less than half of the total, or $15.2 trillion.

     

    Foreign lenders own about $9 trillion, or about 25% of the Treasury securities. About half of this is held by foreign central banks and the other half by foreign financial institutions and individuals. Much of this is used to finance international trade. China owns less than $1 trillion of this. The number has been going down; don’t believe the scare rhetoric that the Chinese government could sell all its U.S. government debt and crash the American economy. More is held in “tax haven” (money laundering, money hiding and tax avoidance) countries and banks; the Cayman Islands, a notorious “tax haven,” is now the largest holder of U.S. government debt. It is comforting to know that South American and Mexican drug lords, corrupt government officials everywhere and Russian oligarchs have faith in the U.S government and its dollar.

     

    The Fed is currently selling off part of its large inventory of Treasuries it accumulated to help finance Covid stimulus programs. So it looks like the federal government will have to sell most of its future debt to private Americans and foreign investors.

     

    Americans are always complaining they pay too much in federal income taxes. This year, revenue from personal (household) income taxes will be around $2.4 trillion, or about 1/2 of federal expenditures minus Social Security and Medicare.

     

    FISCAL ACCOUNTING: PROJECTIONS TO 2035

    The projections in this post are from the Congressional Budget Office (CBO), the non-partisan organization that gives Congress figures, analysis and expert advice. These are from January, 2025. They are updated every two years. 

     

    The CBO projections are probably too optimistic. They are trend projections of existing programs and tax revenue. They assume that events such as recessions, epidemics, wars, or any new spending programs, such as to fight the effects of global warming, will not happen over the next ten years. They assume there will be no further tax cuts. Good luck!

     

    Based on past experience, it is likely that at least one recession will occur in the next eight years.

     

    Social Security and Medicare are funded by their own taxes and are working down their trust funds (selling government bonds) that fund part of the benefits. Subtracting Social Security and Medicare taxes and expenditures from the Federal budget, other revenue covers about 80% of all other government spending; the other 20% is the deficit and financed by borrowing.

     

    I first wrote this post about eight years ago (2017). I update it about every two years. Every time it gets more depressing. When interest rates the government paid on the national debt were very low, no one in the government talked about the rising interest expense and what to do about it. But now with higher interest rates on a larger (and growing) national debt, interest expense has risen and has become a larger part of government budgets. Even if interest rates stay where they are now, in 2035 compared to 2025, the increase in interest expense will about equal the increase in personal income taxes, about $1.8 trillion each. In other words, families will be paying more taxes just to cover the increased interest expense.

     

    Interest rates on the national debt are likely to rise as the national debt continues to increase more than nominal (taxable) GDP. 

     

    But still, no serious discussion. I understand why. For 20 years until late 2022, the Fed kept interest rates at very low levels. Among other effects, this was a massive subsidy to the federal government. It kept the cost of the increasing national debt low, below the political radar screen. No elected representative or politician wants to talk about it. The choices to minimize the increase in future interest expenses are political dynamite. Better to blame deficits on welfare payments to illegal immigrants.

     

    For a detailed and lucid presentation of the current federal debt and the issues involved, see John Mauldin’s essay titled “Debtors and Creditors” at mauldineconomics.com.

    SOCIAL SECURITY

     

    Even the most conservative projections are scary as more Americans get older (the number of Americans over 65 years old is expected to double over the next 25 years) and the health care industry is doing a really good job of keeping us baby boomers alive longer (mostly paid for with government funds). In addition, part of Social Security expenses comes from past Social Security taxes that are in the Social Security Trust Fund. This fund is projected to go to zero around 2034/5. Social Security benefits will fall at least 20% or the deficit will come out of general tax revenue. This will add about $300 billion to general expenditures and the yearly deficit. With the rising number of senior citizens, who like to vote (about 30% of registered voters by 2035), guess which alternative is more likely. This could be fixed with some relatively minor changes to Social Security taxes or raising retirement ages spread out over 10 years. But so far Congress has totally ignored this large addition to future yearly deficits and the national debt.

    After 2035, when the trust funds run out, we will have fewer workers paying in to support many more recipients of Social Security and Medicare. More of the cost will come out of general tax revenue, leading to even higher deficits.

    YEARLY DEFICITS AND THE NATIONAL DEBT

     

    The government has benefitted from the very low interest rates engineered by the Fed over the last twenty years. But interest rates began to rise as the Fed quickly raised the Fed funds rate to bring down aggregate demand and the inflation rate in 2022. Of course this had no effect on government spending. Every one percent increase in the interest rate on the national debt will add at least $300 billion a year to expenditures and the deficit. Another way to look at it is that the interest expense in this fiscal year was more than half of the deficit. At current interest rates, total interest expense could be about 60% of the yearly deficit in a few years (as the past lower-cost debt is rolled over) and possibly a higher percent further out. The government is borrowing more money each year to pay interest on past borrowing.


    A combination of rising national debt of over $2 trillion a year combined with rising interest rates would push politicians and us voters even further into denial. So far, everyone wins. We get corporate and household tax cuts. We spend more money on defense and national security than the next nine countries combined. We have generous social welfare, health, and retirement benefits. After paying for Social Security and Medicare with dedicated taxes, we borrow over one-fifth of the total cost of the rest of the budget every year. Even the most optimistic projection indicates that by 2035 all of the income the Federal government takes in will only cover “mandatory” programs (mostly Social Security, Medicare, and Medicaid) and defense. Maybe a part of national debt interest, depending on future interest rates. All of the rest of the budget, all the subsidies and tax loopholes and worthy programs, are funded through borrowing. Who says there’s no such thing as a free lunch program? Party on!

    What is the point of this discussion? Fiscal policy – the size and changes in the size of yearly deficits and government debt – has nothing to do with political philosophy or promoting economic growth and stability. It has to do with lowering tax rates and no one paying the full cost of received benefits and services.

    TRUMP TARIFFS AND TAX CUTS

    A few words about fiscal changes due to proposed programs from the Trump administration and the current budget. 

    The U.S. government received about $100 billion a year in revenue from tariffs before the Trump tariffs. Total tariff revenue could rise by about $250 billion – $300 billion a year, depending on where the final tariff rates end up. This would reduce the projected deficit. If this happens, the higher tariffs of about $3 trillion over the next ten years would offset more than the $2 trillion increase in the national debt increase from the tax cut from the budget bill.

    But not for the wider economy. The extension of the 2017 tax cut mostly benefits upper-income families because they pay most of the income taxes. The tariffs hit all American families. The tariffs are a disguised tax increase. Families will probably pay much of the additional tariffs in higher prices. And more unemployment.  So the combination of the two is an income transfer from all “hard-working” American families to upper-income families and the U.S. government.

    If other countries retaliate, if global supply chains are disrupted, if total investment falls, the chances of a national and global recession go up. Everyone loses.

    THE DECIFIT, TAX RATES, AND TAX POLICY

    Personal income taxes were $2.4 trillion in 2024. They are expected to increase to $4.2 trillion in 2035. Again, the increase in personal income taxes is equal to the increase in interest expense.

     

    The size of the deficit can also be affected by changes in the income tax rates but only to a limited extent. About 45% of all households pay no federal income tax. Of all the households that file an income tax, about 80% pay more in “payroll taxes” (Social Security and Medicare taxes) than income taxes. The Federal government collects only slightly less revenue from payroll taxes (Social Security and Medicare) than from personal income taxes.

     

    A high percent of personal income taxes is paid by high income households; they receive most of any personal income tax cut.

     

    Studies by the IRS show that small businesses and high-income households substantially underreport their income. Large corporations pay substantially less than the statutory rates; some large companies, including GE in the past, paid nothing at all. Large social media companies have moved much of their intellectual property to Ireland, which has one of the lowest corporate tax rates in the world. Warren Buffett’s company pays a lower tax rate than almost everyone reading this post. Many industries have special tax reduction rules, including “depletion allowances” for oil and natural gas drillers. Property developers and commercial property owners are notorious for not paying income taxes.

     

    The Trump administration, through DOGE, has laid off many IRS auditors. Further cutbacks are in the current budget bill. Given his background, I guess President Trump just does not like the IRS collecting taxes from rich people and tax dodgers.

     

    FINANCING THE FISCAL DEFICITS:  THE BOND MARKET

     

    Even as the nominal GDP, and thus the tax base, increases, the yearly deficit exists year after year. The old bonds do not disappear by increased tax revenue paying them off. As the bonds come due (mature), they are retired (paid off or rolled over) with new bonds. Combined with new deficits and debt, the national debt gets larger. And larger. Any political rantings about reducing the national debt is just so much hot air contributing to global warming. (Sidebar – it seems to me that many people who talk about reducing the national debt don’t know the difference between the yearly deficit and the cumulative national debt.)

     

    Again, the government finances the national debt by selling bonds. Who buys the bonds, and why? American bonds are attractive mostly because they are viewed as the safest bonds in the world. That is, the U.S. government is never expected to declare bankruptcy. Over 30 governments since WWII have partially or totally defaulted on their debt. And not just poor countries. In the 20th century, Russia, Germany, China, Japan and Italy have defaulted on their debt. Lost wars and revolutions do that. 

     

    If bond buyers perceive that U.S. bonds are becoming riskier, the first reaction would probably be to demand higher interest rates to compensate for the increased risk. 

     

    There is a fear this year (2025) that the proposed Trump tariff increases might lead to American and foreign holders of the national debt to start selling off U.S. bonds. The increased awareness of the large and rising debt itself increases the risk of holding American bonds. Other reasons are geopolitical. But holding alternative currencies entail the same risks; most of the larger economies have debt/GDP ratios comparable to that of the United States.

     

    Another reason is that the U.S. dollar is falling compared to most other currencies. Holding dollars means that when dollars are exchanged for other currencies, they buy a smaller amount. That is, they are worth less to foreign holders and global corporations.

     

    The increases in tariffs, increases the chance of a national and global recession. This would probably increase the U.S. yearly deficit over the projected CBO projected amounts.

     

    But why does the yearly deficit occur year after year (after year)? Or, as an economist might say, why is it structural and not cyclical as Keynes hoped? After all, total tax revenue goes up most years. If spending stayed the same, each yearly deficit would go down. One day in the Star Trek future, there would be no yearly deficit and a constant national debt. Easy answer: spending goes up and tax revenue doesn’t go up as much as expected because of the political popularity of tax cuts.

     

    FISCAL POLICY AND ECONOMIC POLICY

     

    The federal budget and its deficits do not exist in a vacuum. They are part of the overall economy. Budget deficits are not inherently good or bad. When they occur over the growth cycle is important.  

    Government spending is all lumped together in macroeconomics. Yet what governments spend their money on is important. A lot of it is “income transfers,” taking tax money from one group and distributing it to others. Much of it goes to people who are old or sick or poor but also some goes to less deserving folks. Some of the spending should be considered consumption (gold and marble in decorating the White House). Another part is public investment. This part is vital to economic growth and the development of new technology. Government pays for basic research, public health, infrastructure, education and training, financing and subsidizing private investment, and paying for some of the social costs (such as cleaning up toxic waste dumps) of past private investment and production. This does not include the future costs of fighting the effects of global warming; preliminary estimates are very scary.

    Another way of looking at it:  what the spending financed by debt is used for. A major use in the past has been to finance tax cuts. An extreme example was stimulus programs to fight the recession caused by Covid. Almost all of the stimulus money went to all American families in the form of higher income. The idea was that a big rise in total income would lead to a big increase in total spending. Not as much as expected. There was a big increase in total household saving; many American families didn’t need the extra income. This contributed to later inflation and higher interest rates. This is one reason the prices of stocks and houses are now going up.

     

    What the stimulus money was not used for was investment to increase future economic growth. Some of the money in the bills passed by the Biden administration started to address increased infrastructure needs and the cost of combating the effects of global warming. President Trump, like earlier presidents, wanted Congress to cut back on some of the government’s basic research. It is almost impossible to think of any new technology developed after WWII that the federal government did not help finance and develop, including computers, microchips, jet aircraft, the internet, GPS, digital photography, biotechnology, and autonomous driving. Especially in the early stages of basic research and applied research and development. Developing new technology is the main source of economic growth and thus increases in tax revenue.

     

    The idea that there is some economically rational fiscal policy is a fiction. Presidents who propose yearly budgets and congress members who vote on them are rational. The want to get reelected and expand favorite programs. They ignore the present and future cost of the yearly deficits they create. Somebody else’s problem. Your children and grandchildren. And, of course, there will be fewer of them to foot the bill.

     

    Some commentators believe the “debt overhang” of high and rising national debt and its interest expense will be the cause of our next economic crisis.

     

    ———————————————————————————-

     

    See the companion post Government Finance 102:  Monetary Policy: The Red Queen’s Race for how the Fed has facilitated the creation of our large federal deficit. For many years, the Fed kept the fed funds rate close to zero; this meant the government could increase borrowing faster than interest expense. Almost free money.

    You might want to pair this essay with the latest population and demographic projections (fewer people, more old people). See

    Demographics, Immigration and Future Economic Growth of the United States


    If CBO trendlines were projected out to 2045, the national debt would be more than $70 trillion. U.S total population and the size of the labor force in 2045 is very likely to be less than now. Retired Americans will be a higher percent of the total population.

    You might be interested in

    Introduction to the Stock Market Crash of 1929 and the Start of the Great Depression


    The CBO assumption that nothing will ever go wrong in the U.S. economy isn’t likely. To be fair, this restriction was put on the CBO by Congress.

     

    Elsewhere in this blog, I argue that the main form of our economic competition, and geopolitical rivalry, with China will depend on our success in developing new technologies. See

     

    American Tariffs and the U.S. Economic War with China


    If the United States maintains the current proposed tariffs averaging around 15-20% and because of current economic policies cannot compete with China in global markets, CBO and other economic projections are unrealistically optimistic.

     

    For a list of all the posts on this blog, see 

    List of Posts by Topic

    with links to all other essays. There are posts on the demographics of other countries and the world as a whole, the Beginning of the Industrial Revolution, American Economic History, and American History. Even posts on finance, business, and economics.

  • KELP IS ON THE WAY: How American Kelp Helped Save the English Explosives Industry in World War I

    KELP IS ON THE WAY: How American Kelp Helped Save the English Explosives Industry in World War I

      


    Dr. Andrea Dragon

     

    Seaweed Saves England

           

        

        Each of the hundreds of millions of shells Great Britain fired from thousands of field guns, howitzers and mortars during World War I contained two explosives: cordite, a kind of nitrocellulose (what Americans call smokeless powder) to propel the shell out of the artillery piece and send it flying toward the target, and TNT, the shell’s high explosive payload to blow up the target on impact.  

    In the early months of the war, the demand for cordite far exceeded the manufacturing capacity of Great Britain’s explosives factories.  To meet production demands, in October, 1914, the British Army contacted representatives from DuPont and its 1912 spinoff Hercules, who were the leaders of New Jersey’s established explosives industry, and signed agreements with them to produce nitrocellulose and cordite, load it and TNT into shells, and ship them from New Jersey ports to the Western Front.

           But cordite was different from the nitrocellulose-based smokeless powder products New Jersey explosives pioneers had been manufacturing in “powder towns” since the late 19th century. Unlike American smokeless powder, cordite included nitroglycerin transforming it into a “double-base” explosive.  Although New Jersey’s powder industry had decades of experience with nitroglycerin (at that time, anything, even a liquid, that exploded was a “powder”), no one had ever added it to smokeless powder because nitroglycerin damaged gun barrels.  That’s why the British cordite formula (30% nitroglycerin, 65% nitrocellulose, 0.8% acetone) also included 5% vaseline to coat and shield gun barrels from this kind of damage.

           At first, executives of the New Jersey explosives industry believed nothing much stood in the way of them making tons of cordite and tons of money. Not only was manufacturing nitroglycerin in sufficient quantities fairly easily done, vaseline could be sourced from the large Cheeseborough-Ponds factory in Perth Amboy. America’s vast railroad network could transport the cotton needed to make nitrocellulose from southern states to New Jersey’s powder towns.  Everything seemed to be in place to start building factories for cordite production, but there was still one very big problem the explosives industry had to solve – where to obtain acetone.

           Most readers are familiar with the organic chemical acetone because it’s useful to have around the house not only as a nail polish (which is mostly nitrocellulose) remover but also because there’s nothing better for removing paint or sticky gunk children have spread around.  Bought at the local home improvement center, acetone efficiently cleans off lacquer and oily finishes from metal surfaces before repainting.  Today, it’s one of the many products produced by the petroleum industry and is inexpensive and ubiquitous, but during WWI acetone was scarce because Germany had been the world’s leading supplier.

           It wasn’t as if Great Britain’s early 20th century chemists didn’t know how to make acetone, which was a by-product of burning wood to make charcoal.  The basic principles of acetone production had been known since the Middle Ages, weren’t covered by patents, and didn’t require sophisticated technical equipment. 

    Output estimates vary, but roughly speaking it took a hundred tons of wood to yield just one ton of acetone.  When the war began in 1914, most of Great Britain’s forest reserve was long gone, but Germany’s vast Black Forest had ample trees for making acetone and dominating the market.

           Since 1862, when Louis Pasteur discovered that alcohol was a product of fermentation by clostridium bacteria, chemists had been experimenting with fermentation to learn how the process produced various alcohol-like substances.  One of these chemists, Chaim Weizmann, a Russian immigrant scientist and one of the founders of the modern state of Israel, was researching methods of producing synthetic rubber at the University of Manchester when he discovered that acetone, butanol and ethanol could be created by fermenting starchy grains or potatoes using a type of clostridium bacterium (other, more sinister clostridia bacteria cause botulism and C. difficile) commonly found in soil.  Weizmann patented it two years later.  This breakthrough meant that instead of clear-cutting and burning up Great Britain’s meager remaining forests, acetone could be produced much more efficiently by fermenting an (easily) renewable crop like corn.

           Soon tons of American-grown corn were being shipped to Great Britain to be fermented into acetone, but this process became problematic for three reasons.  First, German U-boat activity made trans-Atlantic shipping  risky.  Second, corn took up precious space in ships that could be used for more high-value cargo.  Third, corn was a food crop and during the war many people in Great Britain were hungry, making it hard for the government to justify turning food into an industrial chemical.  England was importing 30% of its food consumption from U.S. and Canada.  Clearly, other sources of fermentable starch had to be found.  For a while, British children were encouraged to gather horse chestnuts, but fermenting them was unsuccessful and the search for ways to make acetone continued.  

    In 1916, the situation had become so desperate that Prime Minister Lloyd George proposed taking over all distilleries in the United Kingdom and transforming them into acetone factories.

             American explosives manufacturers weren’t sure how they would solve the acetone problem.  Nevertheless, in February of 1915 Hercules Powder Company signed a contract to produce millions of pounds of cordite at its New Jersey nitrocellulose “powder works.”  The contract stipulated that Hercules would have to find an acetone supplier who wasn’t part of any current supply chain to prevent Hercules from either reducing the existing supply of acetone, or from cornering the market.  Not only that, to get the cordite contract, Hercules promised to keep track of all the acetone it used and supply Great Britain with an equal amount. 

           Why was acetone required to make cordite?  Why was a solvent needed to make any kind of smokeless powder?  At its most basic level, nitrocellulose is simply cotton that has been soaked in nitric acid and then dried until it forms a stiff, white mass.  Because ignited nitrocellulose burns first on its surface, forcing a solid mass of nitrocellulose through a large extruding machine not unlike a modern pasta-maker increases its external surface by transforming the single mass into many spaghetti-like strands, or cords.  But before that could happen, the stiff lump of nitrocellulose had to be mixed with a solvent to change it into a gelatinous dough pliable enough to go into the hopper of the extruding machine, be forced through the holes, and come out the other end as strands of cordite.

           Hercules and other American smokeless powder manufacturers used ether-alcohol as a solvent, but the British specified acetone because cordite made with it required less of the gun barrel-corroding nitroglycerin than powder made with ether-alcohol.  At first, Hercules management tried to make acetone from acetic acid bought from manufacturers of table vinegar but weren’t successful.  Then the company tried arranging with industrial distillers of wood alcohol to produce acetone, but the process was developing too slowly and didn’t produce the quantities needed to fulfill the cordite contract.  Not only was Hercules falling behind the cordite production schedule to the tune of a million pounds a month, it was also woefully short on its promised deliveries of acetone to Great Britain.

             Hercules’s management investigated making acetone from beer slop, molasses, and wood pulp without much success.  The company’s situation was bleak when George Markell, vice-president and general manager of the company’s New Jersey operations, read in an old encyclopedia that Scots living near the coast once gathered kelp from the ocean, dried and burned it in retort-like ovens recovering potash which they used as a fertilizer.  After he learned that acetic acid could be produced by fermenting kelp, Markell developed a plan to harvest kelp from the Pacific Ocean off the coast of Southern California, put it in vats, allow it ferment like beer, capture the acetic acid given off in the fermentation process, and make acetone from the acetic acid.

           Markell knew a huge bed of kelp existed a short distance from San Diego and best of all, it was essentially free.  Markell went to California in 1915 and began buying up land near Chula Vista, then contracted with a Midwest farm equipment manufacturer to design and build a large hay-mower capable of operating in sea water.  Hercules wasn’t the only explosives company seeking to cash in on the skyrocketing demand for acetone so Markell concocted a cover story claiming his company was going to “farm” kelp to make potash fertilizer.  Soon 1,500 Hercules employees were using the special mowers to harvest tons of kelp, load it onto barges which transferred it to shore where some of it was used to make potash while the rest was put into two-hundred 50,000-gallon wooden tanks and allowed to ferment producing acetic acid that was further processed yielding not only acetone, but other useful ketones such as methyl-ethyl ketone, a lacquer thinner, as well as potassium nitrate (saltpeter) one of the ingredients of black gunpowder. By the middle of 1917, nearly one million pounds of acetone, produced from 600,000 tons of kelp, had been loaded into railroad tank cars and shipped to New Jersey where 5,000 tough, brave powder men and women working in hazardous conditions made cordite for Great Britain at a rate of 100,000 pounds per day.

           After the war, Hercules closed its Chula Vista operation in 1919 and today the site is a nature center.

           Recently, I ran across a 2022 scholarly article describing new efforts to produce acetone from kelp harvested off the coast of Scotland.  This article ran to forty-two pages, had eleven authors, and contained eighty-five footnotes but not a single word about the Americans who fermented kelp, produced acetone, and made the cordite that helped Great Britain achieve victory in World War I.

     

    Dr. Dragon teaches a course at Rutgers University, New Brunswick, New Jersey on the New Jersey explosives industry.

     

    Related essays by Dr. Dragon:


    The Maxim Machine Gun and Smokeless Powder


    New Jersey Artillery Explosives Production in World War I