Oxford University Press's
Academic Insights for the Thinking World

This Day in History: The New York Stock Exchange is Formed.

On this day in 1792 the New York Stock Exchange was formed. We turned to Oxford Scholarship Online(OSO) to find out more about the NYSE. OSO helped us find Wall Street: A History by Charles R. Geisst. Below is an excerpt from Geisst’s introduction.

Like the society it reflects, Wall Street has grown extraordinarily complicated over the last two
centuries. New markets have sprung up, functions have been divided, and the sheer size of trading volume has expanded dramatically. But the core of the Street’s business would still be recognized by a nineteenth-century trader. Daniel Drew and Jacob Little would still recognize many trading techniques and basic financial instruments. Fortunately, their philosophies for taking advantage of others have been replaced with investor protections and a bevy of securities laws designed to keep the poachers out of the henhouse, where they had comfortably resided for almost 150 years.

Bull markets and bear markets are the stuff that Wall Street is made of. The boom and bust cycle began early, when the Street was just an outdoor market in lower Manhattan. The first major trauma that shook the market was a bubble brought on by rampant land speculation that shook the very heart of New York’s infant financial community. In the intervening two hundred years, much has changed, but the Street still has not shaken off
the boom and bust mentality. The bear market of the 1970s and the recession of 1982 were followed by a bull market that lasted longer than any other bull market except the one that began in the late 1950s.

Wall Street history has undergone several phases, which will be found here in four distinct periods. The first is the early years, from 1790 to the beginning of the Civil War. During this time, trading techniques were developed and fortunes made that fueled the fires of legend and lore. The second period, from the Civil War to 1929, encompassed the development of the railways and the trusts, the robber barons, and most notably the money trust. It was not until 1929 that the money trust actually lost its grip on the financial system and became highly regulated four years later. Only when the grip was broken did the country enter the modern period of regulation and public accountability. The third period was relatively brief but intense. Between 1929 and 1954 the markets felt the vise of regulation as well as the effects of depression and war. The fourth and final period began with the great bull market of the Eisenhower years that gave new vitality to the markets and the economy.

Stock and bond financing began early, almost as soon as the new Republic was born. During the early period, from the 1790s to the Civil War, investors were a hardy breed. With no protection from sharp practices, they were the victims of predators whose names have become legends in Wall Street folklore. But the days of Drew, Little, and Vanderbilt were limited. The second-generation robber barons who succeeded them found a government more interested in developing regulations to restrain their activities rather than looking the other way.

The latter part of the nineteenth and the early twentieth century saw a consolidation of American industry and, with it, Wall Street. The great industrialists and bankers emerged during this time to create the leviathan industrial trusts that dominated economic life for nearly half a century. Although the oldest Wall Street firms were only about fifty years old at the turn of the century, they were treated as aristocracy. The great banking houses of Morgan, Lazard, and Belmont were relatively young but came to occupy a central place in American life, eclipsing the influence of the robber barons such as Jay Gould and Jim Fisk. Although the robber barons were consolidators and builders in their own right, their market tactics outlived their industrial prowess in the annals of the Street.

The modern era in the financial world began in 1934 when New Deal legislation severely shackled trading practices. Investor protection became the new watchword as stern new faces replaced the old guard that had allowed the excesses of the past under the banner of free enterprise. The new regulators were trustbusters whose particular targets were the financial community and the large utility holding companies. No longer would nineteenth-century homespun philosophies espousing social Darwinism be permitted to rule the Street. Big fish would no longer be able to gobble up small ones. Small fish now had rights and were protected by the new federal securities laws.

The fourth phase of Wall Street’s history came in the late 1950s, when the small investor became acquainted with the market. Many securities firms began catering to retail customers in addition to their more traditional institutional clients such as insurance companies and pension funds. With this new emphasis, the Street began to change its shape. Large, originally retail-oriented firms emerged as the dominant houses. The result was all-purpose securities firms catering to all sorts of clients, replacing the white-shoe partnership firms of the past.

Since the Great Depression, the major theme that has dominated the Street has been the relationship between banking and the securities business. The two have been purposely separated since 1934 in order to protect the banking system from market catastrophes such as the 1929 stock market crash. But as the world becomes more complex and communications technology improves, the old protections are quickly falling by the wayside in favor of integrating all sorts of banking activities under one roof. While this is the most recent concern on the Street, it certainly has not been the only one.

Throughout its history, the personalities on Wall Street have always loved a good anecdote. Perhaps no other segment of American business has such a fondness for glib phrases and hero worship. Many of these anecdotes have become part and parcel of Wall Street lore and are included in this volume. They were particularly rampant in the nineteenth century, when “great man” theories of history were in vogue. Prominent figures steered the course of history while the less significant simply went along for the ride. As time passed, such notions receded as society became more complex and institutions grew and developed. But originally, the markets and industrial society were dominated by towering figures such as Andrew Carnegie, John D. Rockefeller, and J. P. Morgan. Even the more typical robber barons such as Commodore Vanderbilt and Jay Gould also were legends in their own time. Jay Gould became known as “Mephistopheles,” Jay Cooke the “Modern Midas,” and J. P. Morgan the “financial gorgon.” Much of early Wall Street history involves the interplay between these individuals and the markets. One of the great puzzles of American history is just how long Wall Street and its dominant personalities were allowed to remain totally independent from any meaningful source of outside interference despite growing concern over their power and influence.

Several startling facts emerge from the Street’s two-hundred-year existence. When the Street was dominated by individuals and the banking aristocracies, it was usually its own worst enemy. Fortunes were made and lavishly spent, capturing the headlines. Some of the profits were given back to the public, but often the major impression was that market raiding tactics were acts of collusion designed to outwit the smaller investors at every turn. The major market falls and many banking crises were correctly called “panics.” They were the results of investors and traders reacting poorly to economic trends that beset the country. The major fear was that money would be lost both to circumstance and to unscrupulous traders more than willing to take advantage of every market weakness.

The crash of 1929 was the last old-fashioned panic. It was a crucible in American history because, while more nineteenth- than twentieth-century in flavor, it had no easy remedy. The major figures of the past such as Pierpont Morgan were not there to help prop up the banking system with their self-aggrandizing sense of public duty. The economy and the markets had become too large for any individual or individuals to save. The concerted effort of the Wall Street banking community to rescue the market in the aftermath of the crash proved to be too little too late. Investors had been ruined and frightened away from a professional traders’ market. No one group possessed the resources to put the economy on the right track. America entered October 1929 very much still in the nineteenth century. By 1933, when banking and securities legislation was finally passed, it had finally entered the twentieth century. From that time on, the public demanded to be protected from investment bankers, who became public enemy number one during the 1930s.

Throughout its two-hundred-year history, Wall Street has come to embrace all of the financial markets, not just those in New York City. In its earliest days Wall Street was a thoroughfare built alongside a wall designed to protect lower Manhattan from unfriendly Indians. The predecessor of the New York Stock Exchange was founded shortly thereafter to bring stock and bond trading indoors and make it more orderly. But Wall Street today encompasses more than just the stock exchange. It is divided into stock markets, bond markets of various sizes and shapes, as well as commodity futures markets and other derivatives markets in Chicago, Philadelphia, and Kansas City increasingly known for their complexity. In the intervening years, other walls have been created to protect the public from a “hostile” securities business. The sometimes uneasy relationship between finance and government is the theme of Wall Street’s history.

Recent Comments

There are currently no comments.

Leave a Comment

Your email address will not be published. Required fields are marked *