The Real Story of How America Got Rich

From 1800 to 1950, we acted, economically, the way China is acting today.
  • Transcript


Question: How did America really get rich? 

Clyde Prestowitz: It’s important, I think, to know that story because I think there’s a mythology in the United States that America kind of got rich as a result of entrepreneurial activity and free markets and lack of regulation. And for sure those were important elements, but what we need to understand is for most of our history—from about 1800 until about 1950—we acted, economically, pretty much the way China does today. 

In fact, it’s interesting to go back and read the discussions among the founding fathers. Adam Smith wrote “The Wealth of Nations,” published it in the same year, 1776, as, of course, the Declaration of Independence. Smith argued, for example that America had its greatest advantage in raw materials; timber, and iron ore, and cotton, and things like that. Smith actually argued that America should not industrialize. England was the industrial power and America should feed England with raw materials. It was Alexander Hamilton that said "No, no, no, Smith has it wrong. We can become a great industrial power and we should." And there was a big debate with Washington and Hamilton kind of on one side of the debate and Jefferson and Franklin on the other side. But, the war of 1812 was a war we almost lost because we didn’t make shoes, or rifles, or anything that we needed to fight a war. And that convinced Jefferson that he had been wrong, and so from that point forward, the U.S. government engaged in active promotion of the development of key industries, of infrastructure, of technology, the advance of science and so forth. So we had the Eerie Canal, the telegraph was invented and developed in the basis of government funding; a partnership with private industry. 

We had of course the national railroads, the transcontinental railroads. We had... in the early 1900s, Woodrow Wilson saw to the development of an American shipping industry, and created the national advisory committee in aeronautics to promote U.S. aircraft and aviation industry. So, it’s important to understand that there was a long partnership between industry and government in the United States that promoted this development of wealth-producing capacity. The Homestead Act is a brilliant example. America’s biggest industry in the 19th century was agriculture and the Homestead Act provided agricultural land. So, essentially factories to the populus at a very low cost from the government, and the proceeds of that were used to fund the land grant universities; the big state universities that dominate our scene today and to promote agricultural technology. So that was the basis of our wealth-producing capacity. 

Question: Why were the years after World War II the beginning of the U.S.’s downfall? 

Clyde Prestowitz: In the early 1950s the United States had a level of consumption that was about 56, 57 percent of GDP, very similar to that of many other countries. The great fear of our leaders after World War II was that without the war production, the economy would slip back into the Great Depression that they had all experienced in the 1930s. And they had 15 million men and women being demobilized from the armed forces all coming back looking for jobs, and the question was, “Wow where are the jobs going to come from?” And with Europe in ashes and Japan in ashes, it was obvious that an export-led drive was not likely to be successful, and so the focus was on promoting domestic consumption as a way of replacing the wartime production and providing jobs for the returning demobilized service people. And so, every effort was bent in the G.I. Bill, and G.I.s were given preferential assistance in getting mortgages for houses. People were able to deduct the interest on time payments for consumer durables, so all kinds of measures were taken to make it easy to consume. By the mid-1960s, consumption as a percent of GDP was up to 62 or 63 percent. By the mid-1970s it was up to about 67 percent. By the mid 1980s, it was approaching 70 percent. Today, it’s about 72 percent. So, there’s been this huge continual increase in consumption and reduction then in savings in the U.S., and in investment, and ultimately of course this is resulted in big imbalances.

Recorded on May 10, 2010
Interviewed by Jessica Liebman