US Economic History and the History of the Markets

After the Constitution was ratified (1788), Treasury Secretary Hamilton built federal finances through debt consolidation, tariffs, and the establishment of the First Bank of the United States (BUS, 1791). When Jefferson and Madison refused to renew the bank, the First BUS closed in 1811, leading to chaos in war financing during the War of 1812.

After the Second Bank of the United States (1816) was established, credit expansion and western land speculation recurred, and in 1819 the first nationwide financial panic in the US occurred. When President Jackson's 'Bank War' (1832-36) dismantled the central bank, state banks proliferated, and the Specie Circular (1836) sharply contracted credit, leading to the Panic of 1837 and a depression of more than five years.

The Panic of 1857 was the first international economic crisis to cross the Atlantic over the telegraph network. To finance the Civil War (1861-65), the first federal fiat currency, the 'greenback,' and an income tax were introduced, and after the war the railroad, steel, and oil industries grew explosively, opening the Gilded Age. Amid a regulatory vacuum, market manipulation such as the Erie Railroad War and Black Friday was rampant, and the 1873 collapse of railroad speculation produced a 'Long Depression' of 65 months by NBER's measure.

The Panic of 1893 failed more than 500 banks through railroad over-investment and depletion of gold reserves and pushed the unemployment rate up to about 19%. In 1896, Charles Dow first computed the Dow Jones Industrial Average with 12 stocks, beginning to track the market as a single number. When JP Morgan drew on his own fortune to rescue the banking system in the Panic of 1907, a consensus formed on the need for a central bank, leading to the enactment of the Federal Reserve Act in 1913.

The Federal Reserve Act of 1913 created the Federal Reserve System (the Fed), restoring the central bank function for the first time in 102 years since the closure of the First BUS in 1811. US entry into WWI (1917) was followed by issuance of Liberty Bonds and a manufacturing boom. After the war, a plunge in demand and Fed tightening brought a severe deflationary depression in 1920-21 (wholesale prices -45%, unemployment 12%), but it ended briefly in about 18 months.

The Fed's low interest rates, the spread of new technologies such as automobiles, radios, and electric power, and an installment-finance consumer revolution combined to produce the 'Roaring Twenties.' A craze for buying stocks on credit (margin loans) spread even to the middle class, and by the end of 1928 broker loans reached $6 billion. The Dow Jones rose about sixfold (+495%) from a low of 64 in 1921 to a peak of 381 in September 1929, but at a peak P/E of about 32 the bubble reached its extreme, and the Fed's rate hikes set the trigger for the collapse.

The Great Depression began with the -12% single-day plunge of the Dow Jones on 'Black Tuesday' in October 1929. The Dow Jones plunged about -89% from its 1929 peak of 381 to its 1932 bottom of 41. The unemployment rate reached 25%. FDR's New Deal (1933-1938) laid the foundation of a welfare-and-regulatory state, including bank rescues, the TVA, the Social Security Act, and the creation of the SEC. A 'tightening mistake' in 1937 brought a renewed recession, and WWII munitions demand became the final way out.

After the attack on Pearl Harbor (1941), the US wartime economy saw defense spending reach 40% of GDP and unemployment plunge to the 1% range, finally ending the Great Depression. The 1944 Bretton Woods Agreement fixed gold at $35 per ounce, established the dollar as the international reserve currency, and created the IMF and World Bank. That same year the GI Bill laid a ladder for the formation of a postwar middle class, and by the war's end in 1945 the US accounted for about 50% of world GDP.

With the war's end, wartime government spending plunged, real GDP contracted about 11% in 1946 and inflation surged to 18%, but the release of pent-up consumer demand kept unemployment stable below 4%. The Employment Act (1946) specified full employment as a federal responsibility, and the Truman Doctrine (1947) began the Cold War and permanent defense spending. The Marshall Plan (1948, $13 billion) rebuilt Western Europe and opened the largest export market for US manufacturing.

The postwar baby boom, suburbanization, car culture, and the spread of TV drove a consumption explosion. The Korean War (1950) boom and Eisenhower's Interstate Highway System (1956) integrated manufacturing and logistics, and in 1954 the Dow Jones recovered its 1929 peak after 25 years. The S&P 500 was launched in 1957, and that same year the Sputnik shock spurred science and technology investment. The GI Bill made higher education widespread, forming a broad middle class.

LBJ's 'Great Society' (1965) welfare expansion (Medicare, Medicaid) overlapped with rising Vietnam War military spending, increasing fiscal deficits and inflationary pressure. The 1968 collapse of the London Gold Pool was a decisive crack in the Bretton Woods dollar-gold system, and the 1970 Penn Central Railroad bankruptcy—the largest US corporate bankruptcy for 30 years—shook the commercial paper market. The Dow Jones hit a peak of 995 in February 1966 and then struggled to break the psychological 1,000 resistance level.

On August 15, 1971, President Nixon declared the suspension of dollar-gold convertibility (the Nixon Shock). The Bretton Woods system effectively ended and a floating exchange rate system began. This was the start of the modern fiat money system, which later became the institutional foundation for monetary expansion.

The 1973 OPEC oil embargo caused oil prices to quadruple (from $3 to $12 per barrel). The 1979 Iranian Revolution brought a second oil shock ($40 per barrel). The CPI reached 11% in 1974 and 13.3% in 1979. The new term stagflation—recession and high inflation occurring at the same time—was coined. The S&P 500 crashed -47% in 1973-74.

Fed chairman Volcker raised the policy rate to as high as 20% (June 1981) to crush inflation in the 13% range. The price was a severe recession in 1981-82 (unemployment 10.8%) and a Latin American debt crisis (Mexico default, 1982). When inflation was tamed to the 6% range in 1982, rate cuts began, becoming the starting point of a historic bull market. The 1984 Continental Illinois bailout was when the phrase 'Too Big to Fail' first came into wide use.

Reagan's tax cuts, deregulation, and increased defense spending combined to produce one of the greatest bull markets in history. The Plaza Accord (1985) drove the dollar down about 40% over two years, becoming the backdrop for the Japanese asset bubble. On Black Monday, October 19, 1987, the Dow Jones plunged -22.6% (508 points) in a single day, recording the largest single-day drawdown ever, but thanks to the Greenspan Fed's swift liquidity supply the market had fully surpassed its prior peak by the end of 1989.

The recession at the end of George H.W. Bush's term (1990-91) overlapped with the S&L (savings and loan) crisis ($124 billion bailout). The Gulf War (1990-91) oil shock added to the strain, but after Clinton took office (1993), a fiscal consolidation policy began and the economy turned to recovery. It was the early stage of internet commercialization, and Netscape had not yet gone public. The S&P 500 fell -7% in 1990, then recovered steadily from 1991-94 for a total gain of +39% over the span.

The spread of the internet fueled a tech-stock frenzy. The Nasdaq rose about 5x from 1,000 in 1995 to 5,049 in March 2000, then plunged -78% to 1,114 by October 2002. Companies with no revenue and no profit reached billion-dollar market caps on the strength of the '.com' name alone. After the bubble burst, Amazon fell -93% and Cisco -89%.

After the dot-com bubble burst, the Fed cut its benchmark rate to 1%, and housing demand exploded. Subprime mortgages surged and the CDO and MBS markets expanded. The S&P 500 recovered +79% from its 2002 low of 879 to its 2007 peak of 1,576. On the surface everything looked good, but this was precisely the period when the seeds of the financial crisis were planted.

The housing-price bubble combined with the securitization of subprime mortgages (MBS and CDO) to spread into a crisis of the financial system. The bankruptcy of Lehman Brothers (Sep 15, 2008) touched off a full-blown panic. The S&P 500 plunged -57% from its 2007 peak through March 2009. The Fed cut its benchmark rate to 0% and carried out quantitative easing (QE1) for the first time. The TARP bailout ($700 billion) and the Obama stimulus ($787 billion) were injected.

QE2 (2010) and QE3 (2012) plus Operation Twist supplied unprecedented liquidity as the recovery market continued. Despite shocks such as the eurozone fiscal crisis, the US credit downgrade (2011, AA+), and the taper tantrum (2013), the index kept climbing, and the S&P 500 broke through 2,000 for the first time in 2014. In December 2015, the Fed raised rates for the first time in seven years, ending the zero-rate era.

Overcoming Brexit (2016) and US election volatility, the 'Trump rally' continued. The Tax Cuts and Jobs Act (2017) lowered the corporate tax from 35% to 21%, lifting corporate-profit expectations. In 2018, the US-China trade war and four Fed rate hikes sent the S&P 500 to -6.2% for the year, but in 2019 three preventive rate cuts and the first break above 3,000 produced +28.9% for the year, filling out the final phase of the second-longest bull market in history (128 months).

In February-March 2020, COVID-19 sent the S&P 500 plunging -34% in just 33 days, making it the fastest bear market in history. The Fed cut the policy rate to 0-0.25% and ran unlimited QE. Congress supported households and businesses through the CARES Act ($2 trillion). Yet a V-shaped rebound had already broken past the prior high by August 2020, and the Nasdaq recorded +43% for the year.

COVID fiscal and monetary stimulus overlapped with supply-chain shocks and the war in Ukraine, driving CPI to 9.1% in June 2022 (a 40-year high). From March 2022 to July 2023, the Fed raised the policy rate 11 times, from 0% to 5.5% (the fastest tightening in history). The S&P 500 recorded -19.4% and the Nasdaq -32.5% in 2022. In 2023, the SVB collapse brought a regional-bank crisis, but the ChatGPT-driven AI boom led a sharp rebound of +43% for the Nasdaq and +24% for the S&P 500.

As the AI craze continued, the S&P 500 broke through 5,000 for the first time in February 2024, and Nvidia's market capitalization swelled to about $3.3 trillion by year-end. In September 2024, the Fed pivoted to rate cuts for the first time in four years, attempting a 'soft landing.' However, in 2025 the reignited tariff war of the second Trump administration widened volatility — the S&P 500 plunged about -10% in just two days in April — and, amid a weak dollar, gold broke above $3,000 per ounce.