The Real Story of How America Got Rich

Question: How did America really get rich? 

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

In fact, it’s interesting to go back and read the \r\ndiscussions among the founding fathers. Adam Smith wrote “The Wealth of \r\nNations,” published it in the same year, 1776, as, of course, the \r\nDeclaration of Independence. Smith argued, for example that America had \r\nits greatest advantage in raw materials; timber, and iron ore, and \r\ncotton, and things like that. Smith actually argued that America should \r\nnot industrialize. England was the industrial power and America should \r\nfeed England with raw materials. It was Alexander Hamilton that said \r\n"No, no, no, Smith has it wrong. We can become a great industrial power \r\nand we should." And there was a big debate with Washington and Hamilton \r\nkind of on one side of the debate and Jefferson and Franklin on the \r\nother side. But, the war of 1812 was a war we almost lost because we \r\ndidn’t make shoes, or rifles, or anything that we needed to fight a war.\r\n And that convinced Jefferson that he had been wrong, and so from that \r\npoint forward, the U.S. government engaged in active promotion of the \r\ndevelopment of key industries, of infrastructure, of technology, the \r\nadvance of science and so forth. So we had the Eerie Canal, the \r\ntelegraph was invented and developed in the basis of government funding;\r\n a partnership with private industry. 

We had of course the \r\nnational railroads, the transcontinental railroads. We had... in the \r\nearly 1900s, Woodrow Wilson saw to the development of an American \r\nshipping industry, and created the national advisory committee in \r\naeronautics to promote U.S. aircraft and aviation industry. So, it’s \r\nimportant to understand that there was a long partnership between \r\nindustry and government in the United States that promoted this \r\ndevelopment of wealth-producing capacity. The Homestead Act is a \r\nbrilliant example. America’s biggest industry in the 19th century was \r\nagriculture and the Homestead Act provided agricultural land. So, \r\nessentially factories to the populus at a very low cost from the \r\ngovernment, and the proceeds of that were used to fund the land grant \r\nuniversities; the big state universities that dominate our scene today \r\nand to promote agricultural technology. So that was the basis of our \r\nwealth-producing capacity. 

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

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

Recorded on May 10, 2010
Interviewed by Jessica Liebman

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

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