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Economic Policies During the Second Industrial Revolution

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  • 0:06 The Gilded Age
  • 1:52 Monetary Policy
  • 4:03 Tariffs and Other Taxes
  • 6:02 Attempts to Rein In…
  • 6:53 Lesson Summary
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Instructor: Alexandra Lutz

Alexandra has taught students at every age level from pre-school through adult. She has a BSEd in English Education.

With encouragement from the federal government, the Second Industrial Revolution transformed America from an agrarian nation into an industrial power. The mixed effects of these changes on the American people prompted Mark Twain to dub the period the 'Gilded Age.'

The Gilded Age

These two pennies look the same, but they're not. One of them is made mostly from copper. The other one is made of zinc with just a thin layer of copper over the top. It is gilded, and it really isn't as valuable as it looks. In the same way, the writer known as Mark Twain called the late 19th century in the United States the 'Gilded Age.' Everything glittered, even if things weren't quite as perfect as they seemed.

In the decades following the Civil War, America experienced a Second Industrial Revolution: a period of tremendous change in technology, society and the economy that transformed America from a collection of regions and rural communities into a unified, urban, industrial power.

Wages, wealth, capital and GDP all rose at the fastest rate in the nation's history (despite several recessions, notable bankruptcies and unparalleled corruption). Inventors unleashed a dazzling array of new ideas, and factories churned out all kinds of consumer and industrial goods. Coal, oil and iron from the Midwest, along with timber and metals from the Far West, contributed to the growth. The powerful men who controlled these industries created new forms of business organization and management, and almost all of it was supported and encouraged by the federal government.

Republicans dominated Congress and won all but two presidential elections during the Gilded Age (the period between the Civil War and WWI). Gilded Age Republicans believed that prosperity was dependent on industrial growth, so most government policies favored business development, with mixed effects on the American people.

Monetary Policy

One hot button was monetary policy. American farmers and debtors in the late 19th century preferred inflationary policies. Inflation occurs when there is too much money in circulation. Prices go up, so one dollar will buy less than it used to. Why would anyone want inflation? Well, let's say you owe $20,000 for a car loan. If the economy is inflated, that $20,000 debt will be worth a lot less in a few years than it is today because it hasn't gone up. At the time, Democrats generally supported inflationary policy.

On the other hand, Republicans, who wanted Americans to invest in industry, generally opposed inflation. People who save or invest money (along with the banks and businesses where they put it) want their money to be worth more; so do salaried workers who don't expect their wages to keep up. In the late 1800s, this meant they supported hard currency policies.

By law, dollars could only be printed if the government had the same amount of money in hard currency. In theory, you could take your dollars into any bank and exchange them for their market value in silver or gold. But the discovery of the so-called 'Comstock Lode' in Nevada mines had flooded the U.S. economy with silver, creating devastating inflation and contributing to an economic crisis known as the Panic of 1873. In response, Republican President Ulysses S. Grant vetoed an inflationary spending bill and Congress passed the Fourth Coinage Act in 1873, removing silver from being used as a currency.

By shrinking the supply of currency, the value of the dollar went up in the nation and stabilized on the world market. Big business investment increased. But by making money harder to come by, the policy hurt not just farmers and debtors (who were now repaying their loans with dollars that were harder to get) but also small business owners, who needed average Americans to keep spending money.

Tariffs and Other Taxes

Except for a brief period during the Civil War, the federal government essentially did not collect an income tax. And since the Supreme Court at the time consistently recognized corporations as people, corporations, like all other individuals, did not pay any federal income taxes. The federal government's main source of income was tariffs and excise taxes (basically, sales tax on certain goods). A protective tariff is a tax on an imported good that raises its price higher than the same product made inside the country. Consumers will usually buy the less expensive option.

Some tariffs were abandoned in the Gilded Age, on goods like coffee that didn't compete with American manufactures. But Republicans generally supported increasing protectionist tariffs in order to protect fledgling American industries from European competitors. In the long run, by encouraging people to buy more American goods, the protective tariffs were supposed to help the country produce more stuff, create more jobs and keep dollars in the country.

Opponents believed that the tariffs benefitted corporate owners who didn't really need the help while hurting consumers who had to pay higher prices. They also pointed out that if discretionary items are more expensive, people won't buy as many of them, so production and employment don't rise. Finally, tariffs hurt farmers because foreign countries retaliated against America's tariffs by imposing their own import taxes on agricultural products. Democrats generally opposed high tariffs.

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