US Independence Day, 2021: the American economy still leads the world

On July 4th, the United States will celebrate its 245th Independence Day. Despite being the strongest economy in the world, the US has gone through economic slumps from time to time. However, it has remained resilient, and a manifestation of that is that the dollar remains the world’s preferred currency.

From meagre beginnings to economic superpower

Aside from receiving various forms of aid from France to finance the American Revolutionary War, the Continental Army even asked private citizens for help. For example, prior to the Battle of Trenton in 1776, General George Washington asked Robert Morris for $10,000 (equivalent to about $310,000 in 2021) to provide provisions for his starving army. Five years later, during the Yorktown campaign, Morris would help Washington secure $1.4 million in loans (equivalent to more than $43 million in 2021). 

According to Measuring Worth, US Nominal GDP in 1790 was $189 million, and by 2019 that number reached $21.4 trillion. Nominal GDP per capita rose from $48 to more than $65,000 in 2019. 

In terms of nominal GDP in 2020, the US was the leading economy in the world, with China trailing behind by about $6 trillion. However the US’s GDP per capita is more than six times greater than that of China. The US’s economic superpower status becomes more evident compared to Europe’s leading economy, Germany, which stands at about $4 trillion and is the fourth-largest economy worldwide. South America’s leading economy is Brazil — the ninth-largest economy worldwide — with a GDP of about $2 trillion. 

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Although it has the largest economy worldwide, the US’s economic superpower status has had its bumps along the way.

The crash of 1929

One of the most famous recessions in the US economy was the stock market crash of 1929 and the subsequent Great Depression. Only ten months into Herbert Hoover’s term as President of the United States,the stock market crashed. On October 29, 1929, known as Black Monday, the DJ30 fell close to 13%. The next day, known as Black Tuesday, the DJ30 plummeted an additional 12%. The DJ30 would continue its freefall until 1933 by when it had lost almost 90% of its value. It would take two decades for the DJ30 to return to its value prior to the Great Depression. 

Some explanations offered as to why the market crashed include: overpricing of stocks; the economy had reached a peak and would fall at some point; overproduction in many industries, causing companies to unload merchandise at a loss; people were “buying on margin” due to the fact that credit was easily accessible; and the fact that the government had raised interest rates weeks before the crash, which in turn, influenced market stability and sharply reduced economic growth. Despite all the explanations given, after the initial plummet, panic leading to “bank runs” only made the situation worse.  

Stock market crash of 1987

1929 was not the only year the stock market crashed. On October 19, 1987, the DJ30 fell more than 22%, the largest one-day drop until that point. Similar to the roaring 1920s when the DJ30 had increased sixfold, during the 1980s, the DJ30 more than tripled its value. The crash affected markets worldwide. Two reasons given for the crash include a series of monetary and foreign trade agreements whose goal was to depreciate the dollar and alter trade deficits, and computer-driven trading models.

The Great Recession

Similar to previous economic crises, right before the onset of the great recession beginning in 2007, the DJ30 surpassed $14,000 for the first time in US history. However, over the next 18 months, the DJ30 would lose more than half of its value, and many invested in the stock markets lost their life savings. The Great Recession was the most serious recession since the Great Depression in the 1930s.

One of the main causes of the Great Recession was the subprime mortgage crisis. As the US real estate market boomed in the early 2000s, banks provided high interest loans to people with weak credit history. Financial institutions took on numerous risky loans and as the housing market declined, many could not repay their loans, and banks foreclosed on assets that were now selling at much lower prices. In 2008, the crisis reached a peak when Lehman Brothers declared bankruptcy and other financial institutions were on the verge of collapsing.

The federal government attempted to stimulate the economy by providing an unprecedented $787 billion aid package. Some believe this saved the economy, while others  think  this caused a prolonged recovery period that would have been much shorter without the bailing out of the banks. 

Covid-19

2020 started out looking like another good year for the economy. In January 2020, reports began of people mysteriously dying in Wuhan, China. There was much confusion and uncertainty about a virus, specifically its lethalness and means of transmission from person to person. However, when it became clear that its effects would have a detrimental impact on the economy, the markets started to plunge. Within a month, the DJ30 plunged more than 10,000 points, hitting its low of just above $19,000 on March 15th. The SPX500 also dropped about 30% during the same time. 

Amidst the confusion, borders closed, travel was halted and self-imposed lockdowns were implemented by governments worldwide. Along with the restrictions, the US government acted quickly, providing stimulus packages to the many parts of the economy affected by the pandemic. By May 31, both the DJ30 and SPX500 had regained most of the value lost due to the pandemic.

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While some sectors would take longer than others to recover from the pandemic, companies whose services could address the new realities of lockdown prospered tremendously. For example, Zoom, which provides video conferencing, saw its share price increase fivefold at its peak. Amazon, which became the preferred way to purchase goods during the lockdown and also allowed people to avoid the crowds of the mall, saw its stock price almost double within a few months. Peloton Interactive, providing home fitness services, saw its share price increase eightfold during the pandemic.

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The coronavirus also introduced a new generation of people to the markets. With the markets in a freefall and people locked up at home, many began opening accounts on various trading platforms. JMP Securities estimates that more than 10 million new brokerage accounts were opened in 2020.

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The currency of the world: the US dollar

Due to the strength of the US economy, the US dollar remains the reserve currency of the world, an outcome stemming from the Bretton Woods Agreement in 1944. According to the IMF, 61% of all foreign bank reserves and around 40% of world debt is denominated in US dollars. 

The US government began issuing paper money in 1861 to help finance the Civil War. Until then, currency had been issued in coins. Congress authorised the Treasury Department to issue “Demand Notes.” Known as greenbacks, because of the green ink on the back of the note, these demand notes were non-interest bearing, and could be redeemed for gold or silver upon demand. A year later, these notes were replaced by legal tender notes.

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In 1913, the United States Congress passed the Federal Reserve Act establishing a central bank to oversee monetary policy. A year after the creation of the Federal Reserve System, the first Federal Reserve Notes were issued. 

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After taking office in 1933, President Franklin Delano Roosevelt began detaching the US dollar from the gold standard, meaning that the value of the paper currency was no longer directly linked to gold. In April 1933, Roosevelt issued Executive Order 6102, requiring people to turn in “all gold coin, gold bullion and gold certificates now owned by them” to the Federal Reserve Banks by May 1, 1933. In exchange for their gold, people were compensated $20.67 per ounce. Failure to turn in gold to the government was punishable by a fine of up to $10,000 and a prison sentence of up to ten years.  

Within two weeks of the May 1 deadline, the government had collected $300 million worth of gold coins and another $470 million of gold certificates. 

The Gold Reserve Act was passed in 1934 and completed the transfer of ownership of all monetary gold in the US to the US Treasury. The price of gold was raised to $35 per ounce, which increased the value of gold held by the Federal Government by 69%. This price would remain until 1971 when President Nixon declared that the US would no longer convert dollars to gold at a fixed price, making the US dollar a fiat currency. 

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A resilient economy with an uncertain future

One trend that can be seen over the course of time is the resilience of the US economy. Though there might be dark days from time to time, the economy has continually bounced back. As the United States celebrates its 245th birthday, it remains the leading economy in the world, although China is right on its tail. With an unprecedented Federal debt of close to $30 trillion dollars, it remains to be seen whether the US can retain its advantage in the long run.

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