On this day in economic and financial history ...
Two key events, both occurring on Dec. 23, may have done more to shape the modern American economy than any other. One is universally hailed as one of the greatest scientific advances in human history, and the other is widely reviled as a corruption of capitalism. Whatever your opinion, their impacts have been undeniable. Let's examine a brief history of both events, to better understand the forces behind them, and to better understand their legacy in modern times.
Defender of the financial system or corrupter of capitalism?
On Dec. 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into law, establishing the central banking system that still maintains America's monetary system -- and to a large extent also directs its economic policies -- to this day.
The pre-Fed system of American finance is complex and fascinating, but it also had many flaws. The country's financial system had operated for decades with no central banking oversight, thanks in large part to Andrew Jackson's fierce crusade against the Second Bank of the United States in the 1830s. This resulted in a number of deep, bewildering depressions and extreme swings between inflationary and deflationary periods over the years as various currency systems were attempted to varying degrees of success. Pre-Fed, each commercial bank in the country issued its own banknotes, which had to be redeemable into gold or silver held in that bank's vaults. Without central banking oversight, government policy had limited effect on the economy -- which may be far more preferable to some pundits today than it was to the American citizens and leaders of the early 20th century.
The spark that ignited calls for reform was the Panic of 1907, a banking crisis brought on by a very small number of stock market participants running a stock-price manipulation scheme that went south. The severity of the bank runs that followed forced John Pierpont Morgan, the eponymous founder of what is now JPMorgan Chase (NYSE:JPM), to step in as a "Federal Reserve of one." Morgan's guarantee of liquidity, some of which was his own but much of which came from arm-twisting fellow bankers, stemmed the tide of the panic, but it convinced many that it was both impractical and highly undesirable to have one private citizen wield such enormous power over America's economy, particularly one who was well into the twilight of his life.
The Federal Reserve Act centralized the power to issue currency in the Fed's hands, and subsequent legislation, particularly during the Great Depression era, significantly expanded its powers. The Fed has come under great scrutiny over the years for its role in altering or exaggerating economic cycles since 1913, but one thing is clear -- inflation and deflation have become far less extreme nearer the present than it was in the years before the Fed's creation.
The Fed, at least in its present form, also seems to have had some effect on market volatility as well. From its creation in 1896 to the establishment of the Fed in 1913, the Dow Jones Industrial Average (DJINDICES:^DJI) had an average absolute daily change in value of 0.82%, either positive or negative. From 1896 to the passage of the Glass-Steagall Act (which greatly expanded the Fed's power) in 1933, the absolute daily change increased to 0.96%. However, from 1933 to 2003, the absolute daily change is just 0.67%. This is not proof of anything other than the fact that volatility lessened after 1933, but it's interesting to consider. In fact, there has been no example of sustained deflationary pressure since 1933.
Visions of dollar signs danced in their heads
All you need to do is say the words "'Twas the night before Christmas," and nearly anyone in America will be able to fill in the next few lines of A Visit From St. Nicholas. This iconic poem, which established many of our now-common renderings of Santa Claus (Saint Nicholas in the poem), was first published anonymously on Dec. 23, 1823 in the Sentinel newspaper of Troy, N.Y. Its use of the eight reindeer pulling a sleigh full of toys, and "jolly old Saint Nick" with white beard and rotund figure, are still frequently seen in Christmas iconography today.
Coca-Cola (NYSE:KO) may be the best-known of any of the thousands of companies using Santa as a pitchman. The company's holiday imagery wasn't the first to use a red-suited Santa with white accents, but its heavy promotion, beginning in the 1930s, did much to cement the image in millions of American minds.
The technology of the century
Without the transistor, we would still be stuck in an Industrial Age. We'd have no true computers, no worldwide communications network -- none of the technological advancements that have shaped the past 40 years and have truly transformed human civilization. The first transistor, developed in AT&T's (NYSE:T) Bell Labs, was first successfully demonstrated on Dec. 23, 1947.
Computers of the 1940s were huge, slow, and far out of reach for the average person. ENIAC, one of the most famous pre-transistor computers, had been turned on mere months before the successful Bell Labs demonstration. It weighed more than 30 tons, took up as much space as an average-sized townhouse, and required so much power that its operators joked that the lights of the nearest city flickered when it was turned on. It was clearly never going to be found in the average business office, much less in anyone's home. Transistors changed that -- but it took a bit of time.
AT&T's first prototype transistor was made from germanium and had gold contacts. By 1954, Texas Instruments (NASDAQ:TXN) developed the first silicon-based transistor, which was easier to manufacture and thus far more affordable at scale. The company lucked out by having a former Bell Labs employee named Gordon Teal, who had intimate knowledge of the germanium design, spearhead this effort. In the 1960s, Fairchild Semiconductor's (NASDAQ:FCS) integrated circuits -- an improvement of the transistor -- helped control the Apollo Guidance Computer for the men who traveled to the moon. In 1971, Intel (NASDAQ:INTC) modernized the transistor design on its 4004 microprocessors, creating a new standard for computing that is still in use today.
John Bardeen, Walter Brattain, and William Shockley, who spearheaded development of the transistor at Bell Labs, went on to win a shared Nobel Prize in physics in 1956 for their work. It was a well-deserved award for developing what may be the greatest invention of the past 100 years. Transistors, most of which are now far smaller than the eye can see, are packed in the billions onto today's computer chips, and continue to drive the Information Age forward, bit by byte.