Historical Impacts on Economic Institutions

Instructor: Nate Sullivan

Nate Sullivan holds a M.A. in History and a M.Ed. He is an adjunct history professor, middle school history teacher, and freelance writer.

In this lesson we will learn about the impact of historical events on economic institutions. We will identify a few examples and highlight the key developments involved in this process.

The Flow of History and Economic Institutions

One of the most iconic moments in economic history was the Stock Market Crash of 1929. Some people went from having millions of dollars to almost nothing overnight. On the day that has come to be known as 'Black Tuesday', October 29, 1929, some 16 million shares were traded, marking the most dramatic stock crash in American history. Devastated that their fortune had been wiped out, some wealthy individuals gave up on life, choosing to commit suicide by throwing themselves off the top of New York's skyscrapers. For the rest of America, the crash marked the beginning of the Great Depression, the worst economic downturn in American history.

Stunned New Yorkers gather following the Stock Market Crash of 1929.
Stunned New Yorkers gather following the Stock Market Crash of 1929.

The 'Crash of 29' was a historical event that had far-reaching consequences. It affected nearly every area of American society and devastated America's economic institutions. So what are economic institutions? In this context, they are more than just large banks and companies. Economic institutions consist of economic structures, patterns, organizations, and companies. So yes, banks and companies are definitely an aspect of economic institutions, but they're not the sum total.

Historical events and economic institutions experience a reciprocal relationship. Historical events impact how economic institutions develop, even as economic institutions powerfully impact the course of history. This reciprocal relationship happens because of historical causation. Historical causation is simply the cause and effect relationship evident throughout the flow of history; it is the way one historical event leads to another.

Let's look at a few examples and learn more about the relationship between historical events and economic institutions.

The Protestant Reformation and the Beginnings of Modern Capitalism

The Protestant Reformation might seem like an unlikely example to highlight the relationship between historical events and economics, but just hang in there. The Protestant Reformation was an anti-Catholic European revolution ignited in 1517 by a free-thinking monk named Martin Luther. The Reformation significantly weakened the power and influence of the Catholic Church, and it helped popularize new ideologies, such as individualism, democracy, and capitalism. Ah, there is an economic institution: capitalism. Capitalism is an economic system in which the means of producing wealth are privately owned (as opposed to being owned by the state). Capitalism is also commonly called 'free market economics' because it is a system free from government interference.

So one of the important theological teachings that emerged from the Protestant Reformation was the Protestant Work Ethic, which was the idea that all kinds of work had value and was glorifying to God and that material wealth was a good gift of God, not something inherently evil. This new ethic prompted increased commerce among European Christians and helped fuel the emergence of modern capitalism. One of the most important sociological works of all time, Max Weber's The Protestant Ethic and the Spirit of Capitalism, explores how the Protestant Work Ethic helped give rise to modern capitalism. So we can see that a historical event that began originally as a religious revolution in time profoundly impacted the economic realm.

A German edition of The Protestant Work Ethic and the Spirit of Capitalism.
A German edition of The Protestant Work Ethic and the Spirit of Capitalism

The First Transcontinental Railroad and the Development of the American West

The railroad was a technology that greatly impacted America's economic development during the 19th century. In 1869, the First Transcontinental Railroad was completed. Built by the Union Pacific and Central Pacific Railroad companies, this railroad line was remarkable for its time because it spanned the continental United States--from the East Coast to the West Coast.

This photograph captures the completion of the First Transcontinental Railroad.
This photograph captures the completion of the First Transcontinental Railroad

The completion of the First Transcontinental Railroad had a monumental impact on American economic institutions. It basically opened the West up to development. With the railroad extending all the way to Sacramento, California, came the demand for business opportunities in the towns and cities along the route. Hotels, saloons, general stores, farms, and all kinds of other businesses soon popped up. The West became 'the West' as we know it, partly because of the First Transcontinental Railroad.

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