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The 1990s have a good image. We tend to remember them as a prosperous, optimistic decade that happened to end with the internet boom and bust. But many of those years were not as cheerful as our nostalgia holds. We’ve long since forgotten the global context for the 18 months of dot-com mania at decade’s end.
The ’90s started with a burst of euphoria when the Berlin Wall came down in November ’89. It was short-lived. By mid-1990, the United States was in recession. Technically the downturn ended in March ’91, but recovery was slow and unemployment continued to rise until July ’92. Manufacturing never fully rebounded. The shift to a service economy was protracted and painful.
1992 through the end of 1994 was a time of general malaise. Images of dead American soldiers in Mogadishu looped on cable news. Anxiety about globalization and U.S. competitiveness intensified as jobs flowed to Mexico. This pessimistic undercurrent drove then-president Bush 41 out of office and won Ross Perot nearly 20% of the popular vote in ’92—the best showing for a third-party candidate since Theodore Roosevelt in 1912. And whatever the cultural fascination with Nirvana, grunge, and heroin reflected, it wasn’t hope or confidence.
Silicon Valley felt sluggish, too. Japan seemed to be winning the semiconductor war. The internet had yet to take off, partly because its commercial use was restricted until late 1992 and partly due to the lack of user-friendly web browsers. It’s telling that when I arrived at Stanford in 1985, economics, not computer science, was the most popular major. To most people on campus, the tech sector seemed idiosyncratic or even provincial.
The internet changed all this. The Mosaic browser was officially released in November 1993, giving regular people a way to get online. Mosaic became Netscape, which released its Navigator browser in late 1994. Navigator’s adoption grew so quickly—from about 20% of the browser market in January 1995 to almost 80% less than 12 months later—that Netscape was able to IPO in August ’95 even though it wasn’t yet profitable. Within five months, Netscape stock had shot up from $28 to $174 per share. Other tech companies were booming, too. Yahoo! went public in April ’96 with an $848 million valuation. Amazon followed suit in May ’97 at $438 million. By spring of ’98, each company’s stock had more than quadrupled. Skeptics questioned earnings and revenue multiples higher than those for any non-internet company. It was easy to conclude that the market had gone crazy.
This conclusion was understandable but misplaced. In December ’96—more than three years before the bubble actually burst—Fed chairman Alan Greenspan warned that “irrational exuberance”might have “unduly escalated asset values.”Tech investors were exuberant, but it’s not clear that they were so irrational. It is too easy to forget that things weren’t going very well in the rest of the world at the time.
The East Asian financial crises hit in July 1997. Crony capitalism and massive foreign debt brought the Thai, Indonesian, and South Korean economies to their knees. The ruble crisis followed in August ’98 when Russia, hamstrung by chronic fiscal deficits, devalued its currency and defaulted on its debt. American investors grew nervous about a nation with 10,000 nukes and no money; the Dow Jones Industrial Average plunged more than 10% in a matter of days.
People were right to worry. The ruble crisis set off a chain reaction that brought down Long-Term Capital Management, a highly leveraged U.S. hedge fund. LTCM managed to lose $4.6 billion in the latter half of 1998, and still had over $100 billion in liabilities when the Fed intervened with a massive bailout and slashed interest rates in order to prevent systemic disaster. Europe wasn’t doing that much better. The euro launched in January 1999 to great skepticism and apathy. It rose to $1.19 on its first day of trading but sank to $0.83 within two years. In mid-2000, G7 central bankers had to prop it up with a multibillion-dollar intervention.
So the backdrop for the short-lived dot-com mania that started in September 1998 was a world in which nothing else seemed to be working. The Old Economy couldn’t handle the challenges of globalization. Something needed to work—and work in a big way—if the future was going to be better at all. By indirect proof, the New Economy of the internet was the only way forward.