The American Way of Growth Part I

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

Economic performance is behind many political and social changes. A better understanding of what drove the superlative American economic growth rates of the 19th and 20th centuries can help us appreciate how to recover that lost growth record. This essay focuses on two of the most significant growth factors in American history, the emphasis on the domestic marketplace and the selection of the best growth industries.

In early republican times, the federal government pursued free trade in international commerce. This approach was influenced by Adam Smith’s The Wealth of Nations , and French physiocrats. Alexander Hamilton’s “Report on Manufactures” of 1791 urged the federal government to sponsor new industrial enterprises to produce iron, brass, gunpowder, and textiles. Hamilton said that “Human enterprise should be allowed to flourish in its own right…but pragmatic politicians understand that government can encourage it with prudent assistance and encouragements.”

It took Britain’s actions to convert the federal government into protectionism. While France and Britain both attacked American shipping during the Napoleonic Wars

, Britain’s actions proved more shocking and offensive for the Republic’s independence. The nation’s most prominent intellectual and Francophile President Thomas Jefferson had opposed manufacturing for many years and advocated free trade. But in 1807, he asked Congress to enact an embargo on trade with Britain and France. Subsequent acts of Congress and the War of 1812 suppressed the vast majority of U.S. international trade.

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

In 1815, the Napoleonic Wars ended, and peacetime goods flooded American and European markets, causing depression everywhere. President James Madison responded with the Tariff of 1816, which gave a boost to key industries including cotton, wool, and iron. The British once again reinforced Americans’ desire for protection and contempt for their country. British MP Lord Brougham made a compelling argument that America should use protection support to protect infant industries. He stated: “It was worth to incur a loss on the first exportation to enable, by the glut to stifle the cradle these rising manufactures of the United States, which the war has forced into existence contrary the natural state to things.” This was Lord Brougham’s case for British deliberate dumping in an effort to decimate America’s youth industries. China used similar strategies to degrade American industries two centuries later.

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

The railroad and related industries (steel and railroad cars and coal and iron mines, among others) powered America’s first industrial revolution and lifted millions out of poverty. Andrew Carnegie, a Scottish immigrant, founded the Carnegie Steel Company in 1872. Carnegie was the founder of the Carnegie Steel Company, the largest and most profitable global steel corporation over the following two decades. Carnegie’s autobiography ties the growth of America’s steel industry to decisions to levy protective duties:

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

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

America has been a nation of abundant land and scarce labor since colonial days. It also enjoys high wages compared to Europe. The story of all industries was similar: high profits and rapid industrial growth created demand for workers. To meet this demand, entrepreneurs had to increase wages. The average American worker saw an increase in their incomes due to the rise of the growth industries. For example, workers moved up to the steel regions, and wages rose because of shortages in other areas or industries.

Perhaps the best example of this was the decision by George Pullman in 1868 to employ African Americans as sleeping car porters. Pullman was not interested in political or racial issues. Pullman was driven simply by the opportunity to make sleeping cars and then sell them to railroads. As a porter, he needed men and slaves to help him. The role of the sleeping car porter was recognized by African Americans half a century later as the best path to middle-class status.

From the 1870s, labor unions were quick to organize in these growth industries. Workers who had decent wages were motivated to organize unions to defend them. Pullman and Carnegie, both ruthless businessmen, worked alongside unions and did not hesitate in driving wages down as profits and prices fell. This led to violent strikes. The common narrative among labor union leaders and members was that the bosses were greedy and cruel oppressors of workers. They also understood that the best opportunities for American workers were in these industries. High productivity and high growth in steel industries led to investment which, in turn, enabled them to grow.

These are the four Hs that define industrial success. Every nation who wants to bring prosperity to its workers needs to have high-growth industries, which are high in profit, productivity, quality, and wages. In testimony to the U.S. International Trade Commission in July, I showed how the new steel mills built in the American heartland since 2018 provided two to three times the pay of traditional businesses located in that area. Last year, America’s major steel companies paid a median annual income to their entire workforce of $117,200–four times what America’s largest private employer, Walmart, pays employees and double what the average American worker earns. Profit sharing and bonuses are a significant part of the pay at two technologically advanced steelmakers Nucor and Steel Dynamics.

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

On January 5, 1914, struggling to find workers to meet demand for his Model Ts, Henry Ford announced that he was doubling the wage of all Ford factory workers, from $2. 50 a day to $5 a day. America was shocked. The Detroit station became a chaotic scene for several days, as men from across the nation arrived to seek directions to Ford Headquarters. Newspaper stories about Ford employment policies further revealed that the company employed a team of ten doctors and 100 nurses to keep employees healthy, as well as legal staff to help workers buy houses and language staff to help immigrant employees learn English. Henry Ford became the first major automaker to employ African Americans in routine factory work instead of menial jobs, when in 1914 he brought a former bricklayer, William Perry, into the Ford works.

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

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

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The third American Industrial Revolution began with IBM. It continues through the Digital Equipment Corporation (Intel, Microsoft), Apple, Google and VMware. It is characterized by visionary entrepreneurs and extraordinary growth rates in each company. Additionally, hundreds of thousands are paid high wages and bonus payments.

It’s important to remember that visionary entrepreneurs tend not to be nice people. A large percentage of the country’s economic success comes from not compassion but necessity. Many of these extraordinary entrepreneurs were motivated by greed and egomania. These men were able to make a huge contribution to America’s economic success through their bold self-belief, and unwavering, relentless efforts to change the current order.

This article is part of the American System series edited by David A. Cowan and supported by the Common Good Economics Grant Program. This publication is solely under the author’s responsibility.