(FORTUNE Magazine) – Down in the dingy lower level of 28 Broadway--which, as the former headquarters of Standard Oil, was once the epicenter of American business--sits the tiny Museum of American Financial History. There in a glass display case, facing a corridor that John D. Rockefeller may have walked, is a graphic reminder of the stock market's past. It's a Wall Street trading desk circa 1960, a testimony to a simpler yet (to hear those who worked there) somewhat maddening way of trading stocks.

Above the desk is a bright-green, five-by three-foot board listing stocks and stock prices, which were changed manually with block numbers, much like an old-fashioned baseball scoreboard. John Herzog, the former chairman of brokerage Herzog Heine Geduld, who donated the desk, remembers the action well. "I'd yell to a junior trader, 'David! Coastal four and a quarter, a half!' Which meant a $4.25 bid, $4.50 offer," recalls Herzog, now 68. "Depending on how active the stock was, he'd change the board every couple of minutes or every few hours. Traders today can't imagine the routines we went through." Indeed, comparing Herzog's quaint workings with today's trading desks is like looking at a Model T parked next to a loaded Escalade. Almost not even the same machine.

Over the 50 years since the FORTUNE 500 first appeared, Wall Street has changed dramatically in almost every way--from radical advances in technology to an explosion in the volume of trading to the proliferation of financial products. One thing that has stayed the same, though, is the cyclical nature of the business. Fluctuating between soaring, exuberant bull markets and bone-crushing, anguishing bears, cycles are the Street's overlay, governing all. And it's almost certainly true that neither technological breakthrough nor regulatory oversight will ever mitigate them. (In fact, anytime you hear some market sage opining that cycles have become a thing of the past--as in 1980, or the late 1990s--you know the markets are probably due for an abrupt turnabout.)

The most significant difference between Eisenhower's Wall Street and today's, however, is the change in the relationships between the Street and corporate America, and between the Street and the U.S. consumer. Simply put, Wall Street has become vastly more important to both. Behind these trends is the rising importance of the shareholder, who has become an immutable guidepost of the executive suite. Tens of millions of Americans today follow the market to a degree that would mystify or even terrify their grandparents. But in the 1950s Wall Street just didn't matter as much to America.

A good example of that is the fact that the first FORTUNE 500 list, published in 1955, didn't list companies' market capitalization (their value in the stock market). Contrast that with today's FORTUNE 500 corporation, where in some cases the company's stock price constantly flickers in the corner of every employee's computer screen. A big change. So how and why did it happen?

To answer that, take yourself back to the mid-1950s. Back to the days of the Cold War, the beginning of the space race, and Brown v. Board of Education. Even though those events might seem to have been ushering in a new era, many Americans were still looking backward to World War II and even to the economic calamities that preceded it. "In the 1950s people were still very fearful of the market," says Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania. "They had vivid memories of the Crash and the Great Depression. Forecasters said stocks would go back down after the war, so many people were afraid of holding them."

While the 1950s have a reputation as a kind of "dead ball" era on Wall Street, by the year the FORTUNE 500 came out the economy and the stock market had actually been on the move for a number of years. From 1929 through 1945 the market had produced an annual return of only 0.8%. But by 1949 a bull market had taken hold that would continue until 1966 and reward investors with a tidy 14% annualized average return. For the year 1955, New York Stock Exchange volume hit 649 million shares, the highest level in more than two decades. (Although today Microsoft alone does that much volume in roughly ten trading sessions.)

Even in a bull market, though, the NYSE was working to drum up interest in Wall Street and investing. The exchange's 1965 Census of Shareholders offered testimonials by ordinary investors on the virtues of stock ownership. From Dr. Jerome Mindrup, dentist, Kansas City: "... stocks can moonlight for you. Whether I'm down at the office or not, my stocks go right on making extra money." Buoyed by rising share prices, the salesmanship worked. This was the era of the Nifty Fifty, so called because the rip-roaring bull market had everyone particularly fixated on some 50 high-growth companies, including Polaroid, Xerox, and IBM. According to Ned Davis Research, by the fourth quarter of 1968 some 37.9% of U.S. household financial assets were in stocks, a level that wouldn't be exceeded for nearly 30 years.

That momentum ground to a halt in the 1970s, a decade that saw the most severe bear market in recent Wall Street history. Between 1966 and 1982 the market produced a dismal average annual return of --1.4%. (And that's before inflation!) The overall capitalization of the stock market as a percentage of GDP bottomed out at 33% in 1982 (the historical average since 1925 is 57%; as of March 31, 2004, it was at 119%, according to Ned Davis Research).

And then, of course, Wall Street's long winter began to thaw. To give you an example of how powerful the bull market of the 1980s and 1990s was, John Herzog reports that in 1976 his firm had $1 million in capital. In 1999 he sold the firm to Merrill Lynch for just under $1 billion. The catalyst for this great bull run: a long-term decline in interest rates, which had previously risen to record levels.

There were other factors at work too. In 1980 a young employee-benefits consultant in Philadelphia named Ted Benna came to the conclusion that a new section of the tax code, Section 401(k), allowed employees to sock away a portion of their salaries in a tax-deferred savings plan that employers could match. Benna says that prayer helped him reach that realization (he's a devout Baptist). To millions of American workers Benna's idea was the answer to their own prayers, as they poured money into these newfangled 401(k)s, much of it into stocks.

A year after Benna's invention a new tax bill created yet another easy vehicle for regular folks to connect to Wall Street. It stipulated that every working American could reduce taxable income by $2,000 by putting that money in a tax-deferred account--an individual retirement account. The IRA was envisioned as an incentive to promote traditional saving. But as the market roared ahead, workers began plowing more and more of the tax-deferred money into the market. Of the more than $2.3 trillion in IRAs at the end of 2002, some $1.8 trillion was in mutual funds or brokerage accounts.

If a majority of Americans were going to become investors and if the goal of any sizable company was going to be to sell itself to the public (and with rising demand the temptation was ever stronger), Wall Street had to get bigger--much bigger. Today financial behemoths like Citigroup, J.P. Morgan Chase, and Merrill Lynch are staples in the FORTUNE 50, and banks, brokers, and insurers overall now constitute more than 21% of the market cap of the S&P 500. That makes it easy to lose track of the fact that the folks populating the Street in the 1950s were hardly masters of the universe. "It was a very small business back then," recalls John Whitehead, former co-chairman and senior partner of Goldman Sachs. "My first office was in a former squash court. There were six people--that was the entire investment-banking department--and I was the seventh, and a bit resented because I reduced the floor space."

Bankers were far from the aggressive pitchmen they've become today. In the 1950s and '60s this was a clubby world driven by old-school ties and based almost entirely in downtown Manhattan. Bankers never called on companies. When corporate executives needed banking done, they came to call on Wall Street. And bankers never poached other bankers' clients. Just not the right thing to do, you know. Investment-banking firms were all private--the NYSE wouldn't let them sell stock to the public--and most of them were partnerships.

However, as more and more companies went public in the late 1960s and trading volume spiked, the limited capacity of this closed society began to be exposed. By 1967 rising trading volume was creating mountains of back-office paperwork that the exchange and its member firms were simply unequipped to handle. For two years the NYSE had to close periodically at 2 P.M.--an hour and a half early--and then during the worst of it, a six-month period in 1968, trading was simply shut down on Wednesdays to catch up with the paperwork. "One day the NYSE just choked on volume of 14 million shares," remembers former Citibank CEO Walter Wriston. "It took us several years to sort it all out." As you might imagine, that took a tremendous toll on the brokerage business. Between July 1968 and July 1970 some 40 members of the NYSE failed.

The eventual solution for this mess of paper was a massive infusion of computing power, to which the exchange and its members were initially somewhat resistant. The fear was that computers would take away jobs and threaten the monopoly that floor brokers and specialists enjoyed. That fear proved somewhat valid with the opening in 1971 of the Nasdaq, an electronic exchange (although the specialist system continues, at least for the moment, to hold sway over the NYSE). But change was inevitable, and computers entered the picture--at first with only mixed success. In 1974 and 1975 trading was halted six times--once as long as 43 minutes--because of computer failure. In the decades since, electronic markets have helped to greatly expand the breadth of equity trading. The impact of computers goes way beyond stocks too. The explosive growth in the trading of derivatives and bonds--total credit-market debt today stands at $33 trillion, a record three times GDP--has been hugely enabled by technology.

Technology has also allowed Wall Street to move physically far away from those sunless blocks of Lower Manhattan. From the venture capitalists' aeries in Silicon Valley to the new wave of insurance operations in Bermuda to a one-man hedge fund operation in, say, Boise, Wall Street today is less a location and more a state of mind, coupled with high-end computing and telecommunications power.

But computing power was not the only factor driving the Street to expand. As Wall Street firms began to compete around the world with giant European banks, they found that their partners' capital was simply inadequate in the international marketplace. Issues of succession at a partnership were often fractious as well. And so, going all the way back to 1970, a young upstart firm named Donaldson Lufkin & Jenrette challenged the status quo and went public despite howls of protest by the NYSE. Over the years every other large Wall Street firm--and many smaller ones too--went public, the last holdout being Goldman Sachs, which took the plunge in 1999.

As public companies, Wall Street firms now found themselves subjected to the same sort of pressure that every other public company faced--the need to maintain a smooth flow of earnings. It was an imposing objective for any company, but particularly for many Wall Street firms that relied on huge, volatile proprietary trading businesses--essentially betting the house's money in trading activities. This type of trading often produces wild swings on the bottom line and that didn't sit well with the new group of shareholders. The solution in some cases was that Wall Street simply offloaded proprietary trading operations or shut them down. In many cases the alumni from those businesses became the founders of hedge funds--private, little-regulated pools of capital with huge incentive packages for their managers--often based in the suburbs in Connecticut.

Deregulation of the securities industry too was reshaping the Street. Slowly but surely in the 1980s and 1990s, the Glass-Steagall Act of 1933, which separated investment banking and commercial banking (and created the two houses of Morgan), faded into oblivion. Laws prohibiting interstate banking also disappeared. Convergence among the substrata of financial services businesses increased. The results? Today Merrill Lynch customers can write checks on their brokerage accounts. Insurance companies sell all manner of investment products. And Wall Street's biggest player is a bank, Citigroup.

The expansion of Wall Street introduced an increasing number of Americans to the markets and to corporate America through their role as shareholders. But that doesn't mean the relationship between the owners and management was always all lovey-dovey. Often, in fact, it was adversarial--even downright hostile. "During the 1980s there was more of an inclination to take a look at what the stock market was doing," says former Procter & Gamble CEO John Smale. "[The attitude of CEOs] began to change because of the advent of hostile takeovers." Corporate raiders like T. Boone Pickens, Carl Icahn, and Irwin Jacobs, armed with junk bonds, began to make runs at companies they considered undervalued. "I'll tell you what led to the presence of so many corporate raiders," said Saul Steinberg, himself a raider, to Institutional Investor magazine in a 1987 interview. "There were tremendous values in a lot of companies that shareholders weren't getting. So smart guys went out and said, 'Hey, if they won't do the job, I'll do it and make the money for myself.' "

Steinberg had a point. Those in management were not owners, they were employees. And by making executives focus on creating shareholder value, raiders helped unlock billions of dollars of wealth for investors. Before the 1980s one tenet of corporate governance was that company management served several constituencies: shareholders, yes, but also employees, customers, and perhaps others too, like citizens of towns in which the company did business. But the shareholder-value crowd insisted that the only clientele that mattered was stockholders. If they were rewarded, then all other players would reap benefits as a byproduct of an ever higher stock price. This mantra of shareholder value, however, could be taken to an extreme and perverted--you can see how this bit of dogma could become a handy all-purpose justification for mass firings, shoddy products, and the dumping of chemicals into rivers.

In the roaring bull market of the 1990s, shareholders--and their proxies, mutual funds and pension funds--flexed their muscles by placing more demands on the corporation. For instance, they and Wall Street's new superstar analysts like Jack Grubman and Henry Blodget wanted more and more information, and they wanted it now! P&G's John Smale remembers this change: "At some point the company began to provide guidance about earnings in the future--before that, the company never commented on future earnings in any public sense." Shareholders increasingly looked to companies that provided regular and smooth earnings. No surprises, just 15% compounded per year, which, as Warren Buffett and others pointed out, was unsustainable. As the markets climbed ever higher, some corporate managers (and soon-to-be fodder for Court TV) found that the only way to sate the demand for better and better numbers was to cheat. You want incredible earnings growth? Skilling and Ebbers at Enron and WorldCom--along with their Wall Street enablers--were ready to deliver. But of course to do so the books must be cooked.

Today it appears we are experiencing the backlash from the days of the cult of the shareholder. CEOs like Howard Schultz of Starbucks argue that employees should be prioritized over stockholders. Companies like Coke and Gillette no longer mete out earnings guidance to Wall Street. And fewer companies have their stock prices on employees' desktops. All this is probably for the better. While it's true that shareholders are the owners of the corporation, it's one thing for employees to work hard for them but quite another for employees to become their slaves. Now a healthier balance is being struck, and CEOs weigh short-term demands of impatient investors against long-term responsibilities of other constituencies.

That bodes well for the future. In fact, despite the recent recession (another cyclical downturn) and a spate of scandals, Wall Street, broadly defined as all things financial, has never been stronger. Street juggernauts are occupying increasingly bigger pieces of the FORTUNE 500 pie. Same too with the indexes: Dow Jones just added insurance giant AIG (which joins Citigroup and J.P. Morgan) to the 30-company industrial average. It's a trend that's likely to continue. What with the U.S. sending manufacturing and now many service jobs overseas faster than you can say "Bangalore," domestic demand for intellectual capital has never been greater. While the center of the financial world will continue to evolve away from Lower Manhattan over the next 50 years, the business of America will increasingly be the confluence of money and ideas that grew out of Wall Street.

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