Looking at a busy NYC street in 1900, we would see an elevated railway but no cars or buses. Were we to have spoken about refrigerators, antibiotics, sound recordings or x-rays, people would have been mystified. And yet within only thirty years, their wagons would be replaced by autos and their gaslights by electricity.
A New York City street in 1900:
The Industries That Disappeared
In 1900, a list of the industries that were listed on U.S. stock markets would have been topped by the railroad. To sell the stocks and bonds that funded expansion, railroads needed stock markets while investors depended on stock market liquidity to buy and sell their securities.
Slipping from 63 percent to less than 1 percent of the value of U.S. stock markets (below) while autos, aerospace and airlines have grown, the railroad illustrates the shift in the composition of the U.S. economy during the past 115 years. Similarly, iron, coal and steel have declined while oil and gas, banking and health have expanded.
The Value of Firms in U.S. Stock Markets in 1900 and 2015
The components of the Dow Jones Transportation Average tell a similar story about the rise and fall of the railroad. In 1900 the railroad dominated the Average.
By 2014 railroads were dwarfed by other types of transport firms:
Our Bottom Line: Creative Destruction
Through the lens of stock market history, we can observe the rise and fall of industries like railroads as their financial prowess grew and contracted. Called creative destruction by economist Joseph Schumpeter (1883-1950), the process illuminates how innovation fuels economic growth when old industries die and new ones take their place.
We could say that U.S. stock markets have provided a record of creative destruction and the financial fuel that propelled it.