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The "Decline" of U.S. Economy: A Historical Comparison

The "Decline" of U.S. Economy: A Historical Comparison

Chen Dezhao

The U.S. economy has experienced vigorous development as well as “decline” three times in the more than 200 years since the founding of the United States. The first “decline” of the U.S. economy occurred in the 1930s when the capitalist world was in the great economic depression. The second “decline” took place in the 1970s and 80s during which the international competitiveness of U.S. commodities and capital decreased drastically. The third “decline” occurred during the recent financial crisis. The reasons and results of the three “declines” are totally different. Following the first two “declines”, the United States entered a new stage of economic growth through reform and innovation. There are still lots of uncertainties whether the U.S. economy would be able to recover this time, but it seems certain that one, the United States has fallen from the peak of economic hegemony and it is unable to change the trend of plural development of the world economy in the 21st century even if its economy could resurge, and two, the U.S. economy remains strong and will witness a fairly long period of development in the wake of fresh scientific and technological revolution.


The capital world plunged into an unprecedented economic crisis in 1929-1934, which is known as the “Great Depression of the 1930s”. The United States was the creator of the depression. On October 21, 1929, the New York securities market plummeted, which turned out to be the prelude to a great economic crisis. Following that, the stock prices suffered successive drastic drops falling to 81 dollars from 365 dollars per stock, and stocks of heavy industry enterprises tumbled most sharply. Between 1929 to1932, the securities devalued for a total of $84 billion due to price dropping, which was more than the total national revenue in 1928. During 1929-1933, 10,500 U.S. banks bankrupted, accounting for 49% of the total in the country. The blow at the U.S. economy dealt by the crisis, which started from the financial sector, was all-faceted and devastating. The industrial production of the United States decreased by 65.6% from its pre-crisis peak in May 1929 to its lowest point in July 1932, sliding back for 25 years to the level in 1905-06. The drop of production of the means of production in particular was most serious. A comparison between the peak month before the crisis and the lowest month during the crisis showed that the production of the mining industry fell by 65.6%, of the pig iron 86.7%, of steel 84.7%, of automobile 92.1%, and of machine-building 96.3%. At the peak of the crisis, the operating rate for the iron and steel industry was only 15% and that for automobile industry just 11%. During the 5 years of crisis, over 130,000 enterprises in the United States closed down. In addition, the crises in industry and in agriculture were interwoven and reinforced each other, making the whole crisis even more serious. The New York Times reported on December 4, 1932 that due to the drastic drop of the price of grains, it became more economic to use grains instead of coal as fuel for the families and offices, and schools in the state of New York had already been using grains as fuel. During the crisis, the total volume of U.S. export and import reduced by 70%, and the export of capital dropped almost to zero. In 1930, the new overseas investment by the United States surpassed $1 billion. It reduced to $26 million in 1932 and further dropped to $100,000 in 1933. The crisis resulted in the distinct shrinking and fall of the economic scale and capacity of the United States. This “decline” experienced by the U.S. economy is one in its real sense.


The second “decline” of the U.S. economy took place in the 1970s and 80s. America’s international economic position fell markedly by the end of the 1960s and beginning of the 1970s. In 1970, the export trade of the six countries of the European Community accounted for 27.6% of the world total, more than doubling that of the United States (13.7%). The figure for Japan was 6.2%. In 1971, the United States suffered from a trade deficit, though the amount was small ($2.2 billion). Shortly, it rose to $6.8 billion in 1972, and since then, it occurred almost every year, which was totally different from what was before the 1970s. The case for Japan was just the opposite. Not only Japan experienced fast increase of its export trade but it also earned a surplus of $300 million in 1965 for the first time since the end of World War II. Its surplus increased annually to reach $5.17 billion in 1972, almost as much as the deficit ($6.8 billion) suffered by the United States in the same year. As regards the world gold reserve, the United States accounted for 29.9% of the total in 1970, which was much less than the European Community (36.9%). The position of the US dollar, though remaining the world’s principal reserve currency and settlement currency, had been clearly weakened, and that of the Deutsche mark and Japanese yen markedly risen. The “dollar shortage” in the initial years after World War II gradually became “dollar oversupply”. This eventually led to the dollar crisis in the early 1970s. In 1971, the United States suspended the exchange of US dollars for gold, and various countries began to implement the floating exchange rate system. The Bretton Woods system centered on gold thus collapsed. This was an important symbol for America’s “decline”.

Contrast to America’s “decline” was the rise of Japan and the Federal Germany (then known as West Germany). The most striking aspect of Japan’s rise was the change in Japan’s position in international trade and finance, and behind this change was the fast improvement of the competitiveness of Japan’s manufacturing industry. The change in Japan’s position in trade was attractive because it not only possessed a colossal trade volume but more so because it had a huge trade surplus rarely seen in the history of world trade. But until then, Japan was not the largest export country in the world though the ratio of Japan’s export in the world’s total rose from 6.5% in 1980 to 8.9% in 1989. The export volume of West Germany was obviously larger than that of Japan. At that time, the United States and West Germany, not Japan, were the largest export countries in the world, but most of the focus and discussion were put on Japan’s economic expansion, not West Germany’s. Even the renowned U.S. weekly magazine Time published a cover photo of the Statute of Liberty wearing the Japanese kimono. There were two main reasons. One was that Japan’s trade was not balanced. Japan’s trade surplus was too big. America’s trade deficit hit the record of $170.3 billion in 1987, which caused a great stir in the country, and half of it was with Japan. In the late 1980s, West Europe enjoyed a surplus in general and it reached $16.9 billion in 1988, but it still suffered a deficit with Japan amounting to $31.3 billion, which was 1.8 times of West Europe’s total surplus. The other reason was Japan’s expansion in the financial field. Japan did not use its huge trade surplus on domestic needs but on expansion in the financial and investment fields. Japan’s direct investment in the United States totaled $53.4 billion in 1988, a 51.8% rise in the growth rate. According to American Banker, a U.S. daily, at the end of the 1980s, the top 10 banks in the world were all Japanese and among the top 25 banks in the world 17 were Japanese with none of them American. Japan also bought and merged American enterprises with money from its trade surplus, thus bringing about major changes in the capital and financial pattern. America Sold Out, a popular book at the time throughout the world, gave detailed descriptions of the rise of Japan and West Germany and how the capital of West Europe acquired U.S. companies. The book caused a sensation in the United States. The authoritative American financial journal Forbes said in its February 22, 1988 issue that Honolulu, in spite of the fact that U.S. flags were still flying over its sky, had already embarked on the road of becoming a colony of Japanese economy. This demonstrated from one facet the panic in America caused by huge amounts of Japanese investment in the United States. In Honolulu, Japanese-owned supermarkets and hotels lined up one after another in the streets, and in the pavements Japanese girls in kimono offering refreshments to passersby were an eye-catching scene.

The fact that in the 1970s and 80s the whole world was talking about America’s “decline” plus the purposeful sensationalization by the United States itself greatly inflated the panic of the American people, which was what the United States wanted. It is true that there were quite few problems in the U.S. economy, which indeed hindered the growth of the economy and the enhancement of enterprise competitiveness, yet it was mainly the faster development of Japan and West Germany that made the United States lag relatively behind. Therefore, the “decline” experienced by the United States this time was a relative one. In the absolute sense, the United States had not declined but instead was still growing, which was different from what happened in the years of Great Depression. Besides, what the United States suffered in the 1970s and 80s was only economic slowdown, not all-round decline. There were heated discussions at the time both inside and outside the United States whether it was the all-round decline of the American society. It can be said assuredly now that the conclusion is negative. One can see that in the military field, the United States had further improved its military superiority in the 1970s and 80s. It was precisely during that period that the United States finally exhausted the former Soviet Union through arms race and by further keeping its economic and military superiority over the latter.


The third “decline” of the U.S. economy occurred in the recent international financial crisis. Both the “century-rare” international financial crisis and world economic recession originated from the United States, the global financial center and sole superpower in the world. Once again the United States was the creator of the current crisis. The subprime mortgage crisis that broke out in the latter half of 2007 constantly escalated and eventually evolved into the gravest international financial crisis and global economic recession since the Great Depression in the 1930s.

Between mid-September and late October 2008, Leman Brothers Holding Inc., the third largest investment bank in the United States, announced its bankruptcy and Goldman Sachs and Morgen Stanley, the top two American investment banks, were transformed into holding companies of banking corporations. By then all the top five investment banks of the United States had collapsed. The Seattle-based Washington Mutual Inc., America’s largest savings and loans bank, was overtaken by the Federal Deposit Insurance Corporation (FDIC), and became the largest bank going bankrupt in U.S. history. Big commercial banks such as Bank of America, Citibank and JPMorgan Chase & Co. suffering from serious losses with their stock prices shrinking by big margins were in imminent danger. By end of October, the stock prices of Citibank shrank by almost 90% over end of 2006. In 2008, 25 banks closed down, and in the first 10 months of 2009, another 115 banks went bankrupt. More than 400 banks were listed by FDIC as “problem banks”. The added number of the above two kinds of banks amounted to 6.5% of the total of American banks (approx. 8,240). What is more, the crisis quickly spread from the financial field to real economy, greatly decreasing investment needs. The quarterly adjusted actual investment in the third quarter of 2008 in the United States recorded a growth rate of –5.3%. The figure for the fourth quarter of the year was –22% and that for the first quarter of 2009 –34.0%. Some scholars made a careful comparison between the major indicators in the current economic recession and those in the Great Depression and various recessions suffered by the United States since World War II and maintained that the current recession, though not as serious as that in the Great Depression, had set a new record in its depth since World War II and was thus the most serious economic recession suffered by the United States since World War II. It was the same case with the global economic recession.

Following the end of World War II, the United States established the international monetary system centered on the US dollar, thus becoming a genuine “dollar empire”. U.S. economic hegemony, if one wants to discuss this subject, was demonstrated most outstandingly in the financial field. Yet it was first and foremost the financial capability of the United States that was hit by the current financial crisis. The sale of Merrill Lynch and application for bankruptcy by Lehman Brothers, two world-famous investment banks, in September 2008 was tantamount to a heavy bomb to the financial sector triggering a forceful financial earthquake that smashed the myth that the American dollar empire was “unbreakable”. Every financial earthquake in history caused changes in the world monetary pattern and it was no exception this time. The bankruptcy of Lehman Brothers gave the renowned English financial group Barclays Plc. a best chance to expand its business to North America. Barclays’ Board of Directors announced in the afternoon of September 17, 2008 that Barclays had agreed to buy Lehman Brothers’ North American Investment Bank and capital market business as well as the accessory equipment at $2 billion. Besides, Barclays also agreed to purchase Lehman Brothers’ New York headquarters at a price close to the market value as well as two data centers in New Jersey worth $1.5 billion. The total worth of these properties exceeded $1.75 billion. What deserves one’s attention is that the crisis has not only impacted the hard strength of America’s financial sector but also affected its soft strength, and subsequently the comprehensive soft power of the United States. The crisis has deeply shaken the super-strong position of the United States and the dollar in the world economy and financial system as well as people’s confidence in the American financial establishments and the dollar, which was established by the United States in several decades after the War. The image and position of the American financial empire has never been so seriously pounded as today since the collapse of the Bretton Woods system in early 1970s. Likewise, the image of American banking tycoons such as Citibank has never been so feeble in people’s eyes. Citibank was not in eminent danger even in early 1970s when dollar-to-gold exchange was stopped as it is now in the current crisis. The dollar dream of the United States, the “dollar empire” that became the strongest country in the world because of the dollar as well as the aircraft carriers, is being smashed. No matter what would be the case when the dollar dream is over, people would no doubt look at the dollar with cold eye.

All the serious international financial crises in history have exerted significant impact on the entire world pattern, and it is no exception this time. Affected by the crisis, America’s ratio in world GDP has further decreased, dropping from 25.4% in 2007 to 23.1% in 2008 according IMF estimations. In the meanwhile, the share for developing countries rose from 28.2% in 2007 to 31.2% in 2008 and is expected to reach 37.7% by 2013, and that for the BRIC countries from 11.92% to 14.3%.

In 1989 when the Cold War just ended, the G7 (United States, Japan, Germany, Britain, France, Italy and Canada) contributed some 62% to the world GDP while the share for China, Russia, India, Brazil, Mexico and South Africa was less than 8%. By 2007, the ratio for the G7 lowered to 55.8% in 2007 and further to 52.7% in 2008 while that for the six major emerging countries rose from 15.2% in 2007 to 16.7% in 2008. The speed of the change has indeed exceeded one’s expectation. Not long after, the G8 that encompasses the G7 was formerly replaced by the G20. No matter how the G20 would evolve in the future, the assumption of the G20 on the international arena marks that the international pattern is undergoing significant change, that multi-polarization and pluralization are further developing and that U.S. unilateralism has suffered more setbacks.


If the first “decline” experienced by the U.S. economy in the 1930s was endogenous and the policy of shifting one’s troubles onto others adopted by various countries aggravated the situation in the country of origin of the crisis, then the “decline” of America in the 1970s and 80s was exogenous and the United States has indeed relatively declined against the rise of Europe and Japan. As regards the recent “decline” experienced by the United States, it is both endogenous and exogenous, a combination of the two.

It is noteworthy that neither the Great Depression in the 1930s nor the dropping of America’s international economic status has led to the long-term decline of the United States. The reasons are multi-fold. The unique natural conditions, relatively stable systems, vigorous creative spirit, strong sci-tech capabilities, etc. are all long-standing factors contributing to the social and economic development of the United States. And the reform and innovative measures taken under the pressure of heavy sense of worry are the most vital and direct reasons for the United States to save its economy from the predicament of decline. To be specific, the Great Depression would most possibly drag the United States into the mire of long-term decline. Especially at a time when the crisis was getting deeper, the then U.S. president Hoover made a radio address saying that citizens should not feel panic about the crisis because market, the “invisible hand”, would play its regulatory role on its own and thus restore the prosperity of the U.S. economy. Things turned out to be the opposite. The economy did not turn for the better but worsened following Hoover’s address. Those were the darkest days in the Great Depression for America. The public, the officials, the enterprise owners, etc. all showed great suspicion toward Hoover’s address and the “invisible hand”. Just at that time, general election was held in the United States. Roosevelt took over as president in January 1931. No sooner than taking office, Roosevelt asked the Congress to confer him “full power” for coping with emergency so as to implement the later on referred to “New Deal” to address the still quickly spreading economic depression. The first batch of New Deal decrees, mainly concerning the financial sector, exceeded 70 in number, the focus of which was to strengthening the state’s intervention in social and economic life. On March 5, 1933, Roosevelt decreed that all banks in the country go on vacation, that is, suspend business, for four days so as to avoid the wave of closing down of more banks due to runs on savings deposit. When the four days were over, the administration passed the “emergency banking regulations”, further extending the time limit for banks to delay the repayment of deposits and refusing applications for small banks with poor credibility to reopen. Those banks allowed to reopen had to apply for new license for business operation. On June 16, 1933, Roosevelt approved a set of new banking regulations to separate the business of the commercial and investment banks, that is, only the commercial banks were allowed to engage in the savings and loans business but no investment activities while the investment banks were permitted only to engage in transactions in stocks and various securities but no savings and loans business. Under the new regulations, the banks became more specialized but their operations more singular. The aim was to prevent the banks from using the clients’ money to engage in speculative activities like making investments so as to insure the stability of the banking as well as the whole financial sector. In the meanwhile, the U.S. government issued batch by batch loans worth $3 billion to the banks to improve their operation. Citizens’ deposits in the banks were guaranteed by the state if they did not exceed the set limit.

In January 1934, the United States introduced currency reform, the main point of which was to stop the circulation of the gold coins and retrieve all the gold coins in circulation. Since then, the United States has always been implementing the system of circulating the paper money, banning private deposit of gold and forcing private banks and individuals throughout the country to hand over their gold to the Federal Reserves Bank for administration by the state. Bank bonds could no longer be changed for gold and gold was prohibited to export. At the same time, the dollar was devalued from 20.6 dollars to 35 dollars for an ounce of gold. This remained the official price of the dollar after the War until the dollar was devalued again in the 1970s.

Apart from the financial sector, the Roosevelt administration also made major interventions in the industrial sector to dilute the class contradiction so that the workers could keep a minimal living.

Roosevelt’s New Deal was a significant change in American history, which touched upon many sectors of the American society and economy and created important conditions for reinvigorating the U.S. economy.

The second major economic reform of the United States since its founding was the transformation centered on the information revolution that took place in late 1980s and early 1990s. This was the result of serious review made on the relative decline of the U.S. economy in the 1970s and 80s. The Reagon administration decided after taking office in late 1970s to vigorously build the “information highway” and develop new and hi-tech industries centered on information technology and industries to stimulate the restoration of U.S. economy with the new and hi-tech industries. The Clinton administration inherited the strategic decision of the Reagon administration. In his State of the Union address he made to the Congress in February 1993 with the focus on the plan to reinvigorate the economy, Clinton maintained that the development of new technologies and their leading position in commercialization was of vital significance in ensuring the prosperity of the American economy. In the meanwhile, the administration issued two documents, one about the new principle to raise economic competitiveness and the other ideas on America’s transformation and called on enterprises and the public to devote themselves to this end. The results of transformation soon manifested themselves. The Journal of Commerce of America said in June 1995 that 10 years ago American companies and industries were constantly losing their shares in the global markets and foreign products poured into the American market but now industry after industry and company after company of America was expanding their respective shares in the global markets, and the turn for this originated from a most important strategic decision America made at the end of 1980s. It can be said that the reinvigoration of the American economy in the 1990s was the product of the strategic reform made in late 1980s.

A review of the history of development of the United States in the past more than two centuries shows that major developments are all results of major transformations. The change in the 1930s was the product of the great crisis for capitalism at that time and the transformation in the 1980s was the result of reflection on the economic decline in the 1970s and 80s. The two reforms are different in many respects but have a common feature, that is, they are all results of timely adjusting the system, strategy and policy of economic development in accordance with the principal contradictions and problems in economic and social development to raise the overall competitiveness of the country. American writer Michael G. Kammen wrote in his book People of Paradox (1972) that America was probably the first such a large-scale society that incorporated reform and change into its culture as permanent transformation thereby allowing a kind of “creative destruction” to constantly change the outlook of American life.


The rise of developing countries as a group in the 20-odd years around the turn of the century is an earth-shaking change in the world economy. Its impact on the world is much more immense than any single event including the current financial crisis. Concerning this phenomenon, we once put forward such a view a few years ago, that is, the development of the world in the 20th century was by and large the development of the developed countries while that in the 21st century would be more the development of the developing countries and the 21st century was the century for the developing countries. We did not know before the financial crisis, however, whether the collective rise of the developing countries could withstand such heavy blow as inflicted by the current financial crisis. We believed theoretically that the rejuvenation and development of the developing countries could be sustainable but we did not know in practice if they could withstand such blows, or if they could go on developing after such grave poundings. Now after the developments and changes that took place in 2010, we can say with confidence that the developing countries have not only withstood the lash of the financial crisis but shall be able to develop in a better and speedier way than the developed countries after the crisis. At present, not just China, or East Asia, or the BRIC countries but also almost all developing regions like Latin America, Central Asia, the Middle East and Africa are doing well in their economies. Such a momentum will most likely keep on in the coming several years. According to IMF data, the proportion of GDP of the developed countries in the world total shall drop from 66.4% in 2009 to 50.0% by 2020 while that of the developing countries rise from 33.6% to 50.0%. At present, China is the focus of attention of the world. A few years later, other newly emerging economies besides China are most likely to attract the people’s attention for their rise and change. Of course, the change in the share of GDP only explains the issue from one aspect, namely, the economic scale. But from the trend of long-term development, the gap between the developing and developed countries in either economic scale or contents shall narrow up. That is the fundamental reason for the irreversible decline of the U.S. economic hegemony.