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Greatest Economic Engine The World Has Known

It has been 400 years since European settlement began in what is now the United States. In that time a land occupied by a few million Neolithic hunter-gatherers, a debt-ridden banana republic has been transformed into the mightiest economy ever known, producing nearly one-third of the world’s goods and services. There are few economic sectors indeed, from agricultural exports to jet-aircraft production to entertainment, in which the United States does not lead.

In these four centuries of economic history, there have been many turning points that changed the future of American business. Some of these turning points were for the better, some for the worse, and some for both. The opportunities for entrepreneurs today are greater in number than they have ever been, even in this most entrepreneurial and opportunity-rich of countries.

The modern American economy traces its roots to the quest of European settlers for economic gain in the 16th, 17th, and 18th centuries. The New World then progressed from a marginally successful colonial economy to a small, independent farming economy and, eventually, to a highly complex industrial economy. During this evolution, the United States developed ever more complex institutions to match its growth. And while government involvement in the economy has been a consistent theme, the extent of that involvement generally has increased.

North America's first inhabitants were Native Americans -- indigenous peoples who are believed to have traveled to America about 20,000 years earlier across a land bridge from Asia, where the Bering Strait is today. (They were mistakenly called "Indians" by European explorers, who thought they had reached India when first landing in the Americas.) These native peoples were organized in tribes and, in some cases, confederations of tribes. While they traded among themselves, they had little contact with peoples on other continents, even with other native peoples in South America, before European settlers began arriving. What economic systems they did develop were destroyed by the Europeans who settled their lands.

Vikings were the first Europeans to "discover" America. But the event, which occurred around the year 1000, went largely unnoticed; at the time, most of European society was still firmly based on agriculture and land ownership. Commerce had not yet assumed the importance that would provide an impetus to the further exploration and settlement of North America.

In 1492, Christopher Columbus, an Italian sailing under the Spanish flag, set out to find a southwest passage to Asia and discovered a "New World." For the next 100 years, English, Spanish, Portuguese, Dutch, and French explorers sailed from Europe for the New World, looking for gold, riches, honor, and glory.

But the North American wilderness offered early explorers little glory and less gold, so most did not stay. The people who eventually did settle North America arrived later. In 1607, a band of Englishmen built the first permanent settlement in what was to become the United States. The settlement, Jamestown, was located in the present-day state of Virginia.

Early settlers had a variety of reasons for seeking a new homeland. The Pilgrims of Massachusetts were pious, self-disciplined English people who wanted to escape religious persecution. Other colonies, such as Virginia, were founded principally as business ventures. Often, though, piety and profits went hand-in-hand.

Business History 1606: The Virginia Company is formed to seek profit from a new business: American settlement. 1612: John Rolfe plants West Indian tobacco in Virginia, the cash crop that assures the colony’s success. 1614: John Smith, finding no gold, sets his men to fishing for cod off New England, pointing the way to the area’s first economic mainstay. 1619: The first blacks arrive in Virginia as indentured servants. Within a few decades slavery becomes the dominant labor system in the South. 1626: The Dutch settle Manhattan, founding the most commercially minded city on earth. 1646: Saugus Iron Works begins operation in Massachusetts, the first major American industrial enterprise. 1652: The first pine tree shilling is minted, giving Massachusetts a reliable money supply. 1784: Thomas Jefferson designs the American currency system, the first decimal money in the world. 1789: Samuel Slater immigrates to New England from the English Midlands, carrying in his head the plans for textile machinery, and becomes “the father of American manufactures.” 1792: A group of brokers sign the Buttonwood Agreement, origin of the New York Stock Exchange. 1807: Robert Fulton demonstrates the first practical steamboat. 1818: The Black Ball Line starts the first regularly scheduled ocean passenger service. 1828: Construction of the Baltimore and Ohio Railroad begins. 1832: Andrew Jackson vetoes the charter renewal of the Second Bank of the United States, and the country will not have a central bank until 1913. 1835: James Gordon Bennett founds the New York Herald and creates the mass media. 1837–43: The first major depression in the United States. 1840: Cyrus McCormick sells his first reaper, beginning the mechanization of agriculture. 1844: Samuel F. B. Morse demonstrates his telegraph, which will revolutionize the speed of communications. 1848: Gold is discovered in California, moving the country’s economic center of gravity sharply westward while setting off an economic boom. 1857–58: The second major depression occurs. 1861–65: The Civil War takes place. It will vastly enlarge the size of the federal government and the national debt, making Wall Street the second-largest securities market in the world, after London, and greatly boosts American industrial production. 1872: Andrew Carnegie visits a steel mill in England and decides to go into steel. By 1900 the Carnegie Steel Company produces a quarter of all American steel. 1873–79: The third major depression occurs. 1879: Thomas Edison perfects the light bulb and begins designing a system to supply households and businesses with electricity, inaugurating the age of electricity. 1887: The Interstate Commerce Commission is created, the first federal regulatory body. 1893–98: The fourth major depression occurs. 1901: United States Steel is organized by J. P. Morgan, in the largest of a wave of mergers that sweeps the American economy beginning in the 1890s. 1903: The Wright Brothers’ first airplane takes off from Kitty Hawk, North Carolina, inaugurating the air age. 1907: A panic on Wall Street, aborted by J. P. Morgan, shows the need for a central bank, which is created six years later. 1911: Standard Oil Co. of New Jersey v. United States is decided, forcing the breakup of the company under the Sherman Antitrust Act. 1913: Personal income tax begins. 1914: World War I starts, and the United States emerges as the center of the financial world, replacing London. 1920: Commercial radio broadcasts commence, inaugurating the age of electronic media. 1929–33: The fifth, and by far the worst, major depression occurs. 1946: ENIAC, the first digital computer, begins operation. 1947: The transistor is developed. It will greatly reduce the size and cost of electronic equipment. 1951: The credit card is invented, expanding the availability of credit to the middle class. 1968: The first four computers are hooked together into what will become the Internet. 1975: “May Day” marks the end of fixed commissions on Wall Street, which will cause a huge, ongoing expansion in trading as the cost of trading rapidly declines. 1977: The Apple II is introduced, and the era of the personal computer begins.

England's success at colonizing what would become the United States was due in large part to its use of charter companies. Charter companies were groups of stockholders (usually merchants and wealthy landowners) who sought personal economic gain and, perhaps, wanted also to advance England's national goals. While the private sector financed the companies, the King provided each project with a charter or grant conferring economic rights as well as political and judicial authority. The colonies generally did not show quick profits, however, and the English investors often turned over their colonial charters to the settlers. The political implications, although not realized at the time, were enormous. The colonists were left to build their own lives, their own communities, and their own economy -- in effect, to start constructing the rudiments of a new nation.

What early colonial prosperity there was resulted from trapping and trading in furs. In addition, fishing was a primary source of wealth in Massachusetts. But throughout the colonies, people lived primarily on small farms and were self-sufficient. In the few small cities and among the larger plantations of North Carolina, South Carolina, and Virginia, some necessities and virtually all luxuries were imported in return for tobacco, rice, and indigo (blue dye) exports.

Supportive industries developed as the colonies grew. A variety of specialized sawmills and gristmills appeared. Colonists established shipyards to build fishing fleets and, in time, trading vessels. The also built small iron forges. By the 18th century, regional patterns of development had become clear: the New England colonies relied on ship-building and sailing to generate wealth; plantations (many using slave labor) in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo; and the middle colonies of New York, Pennsylvania, New Jersey, and Delaware shipped general crops and furs. Except for slaves, standards of living were generally high -- higher, in fact, than in England itself. Because English investors had withdrawn, the field was open to entrepreneurs among the colonists.

By 1770, the North American colonies were ready, both economically and politically, to become part of the emerging self-government movement that had dominated English politics since the time of James I (1603-1625). Disputes developed with England over taxation and other matters; Americans hoped for a modification of English taxes and regulations that would satisfy their demand for more self-government. Few thought the mounting quarrel with the English government would lead to all-out war against the British and to independence for the colonies.

Like the English political turmoil of the 17th and 18th centuries, the American Revolution (1775-1783) was both political and economic, bolstered by an emerging middle class with a rallying cry of "unalienable rights to life, liberty, and property" -- a phrase openly borrowed from English philosopher John Locke's Second Treatise on Civil Government (1690). The war was triggered by an event in April 1775. British soldiers, intending to capture a colonial arms depot at Concord, Massachusetts, clashed with colonial militiamen. Someone -- no one knows exactly who -- fired a shot, and eight years of fighting began. While political separation from England may not have been the majority of colonists' original goal, independence and the creation of a new nation -- the United States -- was the ultimate result.

After declaring its independence in 1776, the struggling young nation found itself on the brink of bankruptcy. Responding to the urgent need for revenue, the First Congress passed and President George Washington signed the Tariff Act of July 4, 1789, which authorized the collection of duties on imported goods. It was called "the second Declaration of Independence" by the news media of that era. Four weeks later, on July 31, the fifth act of Congress established Customs and its ports of entry.

For nearly 125 years, Customs funded virtually the entire government, and paid for the nation's early growth and infrastructure. The territories of Louisiana and Oregon, Florida and Alaska were purchased; the National Road from Cumberland, Maryland, to Wheeling, West Virginia, was constructed; and, the Transcontinental Railroad stretched from sea-to-sea. Customs collections built the nation's lighthouses; the U.S. military and naval academies; the City of Washington; and, the list goes on. The new nation that once teetered on the edge of bankruptcy was now solvent. By 1835, Customs revenues alone had reduced the national debt to zero!

The SEC's foundation was laid in an era that was ripe for reform. Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly true during the post-World War I surge of securities activity. Proposals that the federal government require financial disclosure and prevent the fraudulent sale of stock were never seriously pursued.

Tempted by promises of "rags to riches" transformations and easy credit, most investors gave little thought to the dangers inherent in uncontrolled market operation. During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, half became worthless.

When the stock market crashed in October 1929, the fortunes of countless investors were lost. Banks also lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a "run" on the banking system caused many bank failures.

With the Crash and ensuing depression, public confidence in the markets plummeted. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. The Securities Act of 1933 and the Securities Exchange Act of 1934 were designed to restore investor confidence in our capital markets by providing more structure.

Monitoring the securities industry requires a highly coordinated effort. The Securities and Exchange Commission was established in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC.

John Steele Gordon. 10 Moments That Made American Business. . March 2007.

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