16.2 Economic History, Measuring the Economy & the Texas Economy

Overview & Exam Relevance

This section completes Competency 004 (Economics). It covers:

• how an economy is measured;
• the role of government in the economy, including taxes and regulation;
• the economic history of the United States and Texas, including boom-and-bust cycles; and
• the growing interdependence of the Texas, U.S., and world economies.

---

The Evolution of the Texas Economy

Few states match the dramatic economic evolution of Texas. Over two centuries, Texas transformed from a cash-poor frontier subsistence territory into an international economic titan.

The Historic Pillars: Cotton, Cattle, Timber, and Oil

Throughout the 19th and early 20th centuries, the Texas economy rested on four natural-resource-based pillars:

HISTORIC PILLARS OF THE TEXAS ECONOMY
│
├── 1. Cotton (19th-Century Cash Crop; Sharecropping & Tenant Farming)
├── 2. Cattle (1860s-1880s Cattle Drives; Longhorns; Barbed Wire Closes Range)
├── 3. Timber (Late 1800s Logging Boom in East Texas Piney Woods)
└── 4. Oil & Petroleum (1901 Spindletop Gusher; Petrochemical Revolution)

1. Cotton: During the 19th century, cotton was the undisputed agricultural "king" of Texas. Cultivated initially in the rich river bottoms of East and Central Texas using enslaved labor, cotton drove the state's integration into global textile markets. Following the Civil War, the destruction of the slave economy gave rise to the tenant farming and sharecropping systems, wherein landless farmers (both freed African Americans and poor whites) worked parcels of land owned by landlords in exchange for a share of the harvest, often remaining trapped in perpetual cycles of debt. By the 20th century, mechanized tractors and irrigation shifted primary cotton production westward to the High Plains.
2. Cattle: Following the Civil War, millions of feral Spanish Longhorn cattle roamed South and Central Texas. Recognizing that a steer worth $3 to $4 in Texas could command $30 to $40 in industrial northern cities, Texas ranchers initiated the legendary cattle drives (1866–1885). Cowboys drove massive herds north along trails such as the Chisholm Trail, the Goodnight-Loving Trail, and the Western Trail to railheads in Kansas (Abilene, Dodge City) for shipment to Chicago meatpacking plants. The era of the open range ended in the late 1870s and 1880s due to the invention of barbed wire (patented by Joseph Glidden in 1874), severe blizzards, and the expansion of railroads directly into Texas, establishing modern enclosed ranching.
3. Timber: The dense pine and hardwood forests of the East Texas Piney Woods sparked a massive timber boom between 1880 and 1920. Lumber companies built company towns, clear-cut millions of acres, and constructed dedicated logging rail lines, making timber the largest manufacturing employer in Texas at the turn of the century. Modern forestry in Texas transitioned to scientific tree-farming, conservation, and paper milling.
4. Oil and the Spindletop Revolution: On January 10, 1901, near Beaumont, a drilling derrick managed by Anthony Lucas struck a massive oil reservoir beneath a salt dome known as Spindletop. The resulting "Lucas Gusher" spewed an estimated 100,000 barrels of crude oil a day for nine days before it was capped, a flow often described as greater than that of all other U.S. wells combined at the time. Spindletop permanently altered Texas history:
   • It catalyzed the Texas Oil Boom, transforming the state from a rural, agricultural economy into an industrial and financial powerhouse.
   • It launched companies that grew into energy giants, including the Texas Company (Texaco) and Gulf Oil, and drew investment that later built firms such as Humble Oil (founded in 1911 and eventually part of ExxonMobil).
   • It stimulated deep industrialization along the Gulf Coast, leading to the construction of vast oil refineries and petrochemical plants along the Houston Ship Channel.
   • It accelerated rapid urbanization as rural laborers migrated to booming industrial cities like Houston, Dallas, and Beaumont.

The Modern Diversified Texas Economy

While petroleum remains a major component of state revenue, a severe oil bust in the 1980s prompted state leaders and private enterprise to diversify the Texas economy into high-growth sectors:

• Aerospace and Defense: In 1961, Houston was selected as the headquarters for NASA's Manned Spacecraft Center (renamed the Lyndon B. Johnson Space Center in 1973). The facility serves as the mission control hub for all U.S. human spaceflights, astronauts training, and aerospace research. Major defense contractors (such as Lockheed Martin in Fort Worth, producing advanced military aircraft) anchor the defense manufacturing sector.
• Biomedical Sciences and Healthcare: The Texas Medical Center (TMC) in Houston has grown into the largest medical complex in the world. It encompasses premier clinical and research institutions (including the MD Anderson Cancer Center, Texas Children's Hospital, and Baylor College of Medicine), employing more than 100,000 people and pioneering breakthroughs in biotechnology, gene therapy, and cardiovascular surgery.
• Technology and Information Systems ("Silicon Hills"): Central Texas, particularly Austin and the surrounding Hill Country, has emerged as a premier global technology center dubbed "Silicon Hills." Major corporations, including Dell (founded by Michael Dell in Austin and now headquartered in Round Rock), Apple, Google, Tesla, Samsung, and semiconductor manufacturers, maintain headquarters or major campuses in the region. The Dallas-Fort Worth "Telecom Corridor" similarly hosts telecommunications and software conglomerates.
• Renewable Energy Leadership: Capitalizing on its vast geographic expanse and wind currents across the High Plains and West Texas (Sweetwater), Texas has become the number one wind energy-producing state in the nation, generating more wind power than most independent countries. Texas is also experiencing explosive growth in utility-scale solar installations and grid-scale battery storage facilities.
• International Trade and Shipping: Operating through the Port of Houston (consistently ranked first in the nation in foreign waterborne tonnage) and major inland customs ports of entry such as Laredo and El Paso, Texas leads the United States in export value. The USMCA (United States-Mexico-Canada Agreement) corridor along Interstate 35 makes Texas the vital trade bridge of North American international commerce.

---

Measuring an Economy

• Gross Domestic Product (GDP): The total market value of all final goods and services produced within a country (or state) in a year. Texas has the second-largest state economy in the United States, after California.
• GDP per capita: GDP divided by population, a rough measure of the standard of living.
• Unemployment rate: The percentage of the labor force (people working or actively looking for work) who do not have a job.
• Inflation: A general rise in prices over time, which reduces what a dollar can buy. It is commonly measured by the Consumer Price Index (CPI).
• Business cycle: An economy alternates between expansion (growth, rising employment) and contraction. A significant, widespread decline that lasts months or longer is a recession.

---

Government's Role in the Economy

• Public goods and services: Roads, schools, police and fire protection, and parks are provided by governments and funded by taxes.
• Taxes in Texas: Texas has no state personal income tax, which the Texas Constitution now prohibits. The state collects a sales tax of 6.25%, and cities, counties, and special districts may add up to 2% more. Local property taxes fund school districts and local governments. Businesses pay a state franchise tax. Texans still pay federal income tax.
• Regulation: Governments set rules to protect consumers, workers, and the environment, for example through food-safety inspections and pollution limits. The Railroad Commission of Texas, created in 1891 to regulate railroads, now regulates the oil and gas industry despite its name.
• Money and banking: The Federal Reserve, the nation's central bank, works to keep prices stable and employment high.

---

Economic History: From the Industrial Revolution to Boom and Bust

• Industrial Revolution: Beginning in Great Britain in the late 1700s, machines and factories replaced hand production. In the United States, textile mills, Eli Whitney's interchangeable parts, steamboats, railroads (the transcontinental railroad was completed in 1869), and Henry Ford's moving assembly line (1913) transformed how goods were made and moved.
• Sectors of economic activity: The primary sector extracts natural resources (farming, ranching, fishing, oil and gas). The secondary sector manufactures and processes goods (refining, construction). The tertiary sector provides services (health care, education, retail, tourism). The Texas economy has shifted toward services and technology while remaining a leader in energy and agriculture.
• Boom-and-bust cycles in Texas: Cotton prices, the cattle boom and its collapse in the 1880s, and especially oil show the pattern. Oil prices collapsed in the mid-1980s, which led to a Texas recession, bank and savings-and-loan failures, and falling real estate values. Afterward, Texas diversified into technology, health care, and trade.
• Entrepreneurs and ethics: Texas entrepreneurs include Florence Butt, who founded the grocery store that became H-E-B in Kerrville in 1905, and Mary Kay Ash, who founded her cosmetics company in Dallas in 1963. Businesses succeed long-term by acting ethically: being honest with customers, paying fair wages, and obeying laws.

---

Economic Interdependence

Texas, the United States, and the world depend on each other for resources, goods, and markets. Mexico is Texas's largest trading partner, and Texas leads the nation in exports. A drought in Texas raises beef prices nationally, and a shortage of computer chips overseas slows car production in Texas. Students can trace the global supply chain of an everyday item, such as a smartphone or a T-shirt, to see this interdependence.