A linchpin of the world economy is put in place with the establishment of the Federal Reserve System in 1913. Highly autonomous from the start, it is the sole issuer of currency and the benchmark bank lender. The same year, the 16th Amendment permitting federal income tax comes into force; the tax is first levied in 1918 under the wartime Revenue Act.
During the freewheeling capitalist boom of the 1920s, companies are born, and shares are issued and traded with relatively few restrictions. When the boom turns to speculative bubble and crashes in 1929, there are no safeguards to protect individual investments. The broad impact destroys the global market for capital, triggering a worldwide depression. Confidence in capitalism is shattered.
Upon inauguration, Roosevelt stabilizes the economy by means of a four-day bank holiday and an embargo on gold and silver sales. The Glass-Steagall Act sets up the Federal Deposit Insurance Corporation to protect bank depositors, along with rules governing and separating banking functions. The U.S. abandons the gold standard, allowing the dollar to lose value and freeing gold reserves.
The Securities and Exchange Commission is set up to govern all trade in securities and to enforce new disclosure rules for publicly traded companies. A leading figure in its establishment is the lawyer James Landis, a "prophet of regulation." One SEC requirement, external auditing of traded firms, launches the modern accounting profession.
The 1944 Bretton Woods conference in New Hampshire establishes the foundation of the postwar global economy, with the birth of the World Bank and the International Monetary Fund. The IMF is designed to stabilize national currencies and assist in balance-of-payments emergencies. Gold flows into the U.S. as Europeans purchase dollar goods, until the British pound is devalued in 1949.
The U.S. dollar has become the global reference currency. At home, inflation remains low. The U.S. balance of payments becomes chronically negative, putting stress on the convertibility of dollars to gold as foreign governments accumulate dollars. In the late 1960s, inflation begins to creep up. It reaches 5 percent and puts pressure on wages to rise in tandem.
Nixon suspends the convertibility of the dollar into gold ("closing the gold window"). Long the world's reference currency, the dollar now loses value in currency markets, and the major countries agree to two dollar devaluations, in 1971 and 1973. The shakeup of the monetary system unshackles the dollar from gold. Their value will seesaw, as gold becomes the refuge when the dollar is seen as weak.
With inflation out of control, the Federal Reserve tightens credit to extreme levels, taking money out of circulation with interest rates above 20 percent. A recession results, but stability returns; the rate spike is, however, a factor in the developing-country debt crisis. The value of the dollar in currency markets travels from record lows to record highs, worsening the trade deficit.
A savings-and-loan industry crisis reveals the complexity of financial-sector regulation. Freed of some restrictions on interest rates and employment of deposits, a string of S&Ls head for bankruptcy, sparking panic in middle America and leaving taxpayers to cover a $300 billion bailout. A 25 percent drop in the Dow Jones index in October 1987 is absorbed without setting off a downward spiral.
America's successful deficit-reduction program and low inflation in the 1990s boom bring down long-term interest rates. Cheap credit encourages consumer spending, and Americans spend liberally. Savings are increasingly channeled into the stock market, and overseas through mutual funds. The emerging-market crisis of 1997-98 and subsequent U.S. stock market volatility temper these trends.
The collapse of Enron, WorldCom, and other corporations ignites fears over the security of employee pension funds and the integrity of corporate accounting. Bush administration plans for long-term tax cuts lead deficit and debt estimates to balloon, spawning political debate. The European common currency, the euro, rises in value and is a potential rival to the dollar as a world reference currency.
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