Question

Please provide a brief history of finance as it relates to the U.S. economy specifically, taking time to connect the history to that of the U.S. from an economic/historical perspective.

Answer 1

We start with the weakest period of the US economy with the great depression in the 1930's and end with the present day situation

The US economy faced a massive downtrend in the 1930s which is referred to as the black period for the US financial system. In the October of 1929, the stock market crashed and around 16 million shares were sold and investors had made their mind that the US financial system has filed. The main reason was that during this period many banks failed and unemployment had touched to a massive 30 percent of the population.

In the years after the great depression, various steps were taken, but the World War II made the US debt situation ever worse. Even after 10 years, the economy continued to be in doldrums. By 1945, the highest marginal income tax rate was a whopping 94%. People and businesses desperately needed tax cuts to survive and expand creating more jobs. In the next two years, the tax rates were cut, the corporate tax rate was reduced to 38% and the highest marginal tax rate was down to 82%. This was further reduced in the succeeding years which lead to gradual recovery in the economy.

The gold standard was also approved for printing of currencies by nations and the central bank could print currencies based on the amount of gold reserves that had. The US economy recovered and was doing fine until 1989 which recorded the next biggest fall. This was caused mainly due to the leveraged buyout of united airlines. This is was a minor panic and the US financial markets recovered in the preceding years.

The next big downturn came in 2002 which was called as the "dot-com" crises. The information technology companies skyrocketed during the years from 1995 to 2000 which was the time the internet was making steady pace around the world, this lead to a bubble formation which finally burst in 2002.

The final downtrend which is described as the worst economic downtrend from times of the great depression was the financial crises that gripped the globe in 2008-2009. This was called as the "Sub-prime" crises and was lead to banks and financial institutions giving away housing loans to non-deserving individuals and in turn they securitized these bad loans and sold off to companies like Lehman brothers. At the height of the crises, the company closed down and steps were taken like the Frank Dodd act to prevent such downtrends in future. From 2009 till today the stock market has performed exceptionally well and financial analysts are thing about what the next bubble could be!