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History and News

A History of the New York Stock Exchange and America's Financial Markets

 

ANOTHER TIME AND ANOTHER PLACE

Not many people are aware of the fact that securities trading existed in other parts of the world substantial before the New York Stock Exchange came into being. This was not an American innovation. Moreover, the markets were sophisticated as well, with attempts to utilize whatever technology was available to get the jump on competitors. Some of the stories that make up the market's lore are anecdotal while others are totally based on fact. This is one arena where no matter whether fact or fiction, the stories are always intriguing.

One of the more famous anecdotes in financial history concerns the occasion when Napoleon took on the Duke of Wellington at Waterloo. At the time, it was widely felt that the loser of the battle would also lose the war, and as a result either France or England were about to pay a horrible economic price; but who would it be and when would we know?

As the story goes, Nathan Rothschild equipped an observer with a homing pigeon and when the Duke of Wellington, with help from Russian mercenaries, won the day, he released it with the good news. Being a good British Pigeon, it flew directly to London with the tidings. Rothschild alerted his agents to sell securities and started a panic, as everyone believed that he must have inside information that France had been victorious. Unbeknownst to the exchange members, Rothschild had other cohorts, strategically placed on the exchange floor, to buy back whatever he sold and then some. Ultimately, the news of Napoleon’s defeat at Waterloo arrived and the market skyrocketed.

Although his tactics could be criticized, Rothschild knew that if he started buying, everyone would have assumed that the battle had been won and the market would have risen. He would not have received a payday for his brilliant strategy. What this story best describes is the fact that those who have early access to information can be well rewarded if, and only if, they know how to take advantage of it.

Rothschild had set up an intricate communications device for the time. Not everyone was so brilliant. In another anecdote of the world’s early financial history, we have to go to Holland in the early 1600s, where everyone had gone temporarily mad. Their belief, somehow, had become that tulip bulbs would become a global medium of exchange and that the price of particular bulbs would be extremely valuable. The prophecy became self-fulfilling and within a space of two years, tulip prices soared. ()

Holland, at that time, had become the civilized world’s financial capital, and most of their strength from the trading their merchant seaman did in all corners of the earth. Journeys often took the sailors away for two years at a time and during that period, there obviously was little or no communication with home.

One of the ships that left Holland, just before the madness took hold arrived back in its home port after being away and out of communication for two years, and as the seamen left the ship they walked through a warehouse in which some goods were being readied for export and others were being received. As he passed a particular area, a seaman noticed what he thought was an onion laying on a countertop; not feeling that it had any value, and having a strong liking for onions, he proceeded to swallow the morsel. As the story goes, the sailor was condemned to debtor’s prison for his transgressions, as he had consumed the most valuable bulb in the land. The seaman was relegated to hard labor for his transgressions; yet had he eaten the same bulb several weeks later it would have been almost worthless as the market had collapsed.

I am also reminded about the story of John Law, who grew up in the early 17th century. John was precocious as a youngster, showing early signs of being a mathematical genius by solving exceedingly complicated analytical questions that were enigmas to even the most clever people of his day. He also possessed two other distinct disadvantages; he was extremely handsome as well as being an inveterate gambler. As his successes exceeded his failures in all of his many pursuits, his fame spread far and wide, and eventually he caught the eye of Louis XIV of France. Louis, as opposed to Law, was having a bad time of it. He wanted all the better things in life, but not having enough money in his own treasury, thought to take from his neighbor’s kingdom. Alas, he did not choose his adversaries well and although he escaped with his life, he went further into debt.

Law, always on top of his game, came up with the solution, "We’ll start a Royal Bank and I’ll run it", he told Louis. Louis retorted, "what good will that do"? Law was prepared, "Lou, you know all those stories about the New World, you know, all that gold and stuff like that"? Louis indicated he was indeed familiar with those stories. Law continued, "We start a company and sell stock in it to the peasants. You know yourself that if we give it the right amount of hype, those guys will believe anything. We take all of the money that comes from them, put it in the treasury and pay off all of your debt, and Louis, there may be even a little left for some of those little trinkets you really like." Louis though for a moment and concluded, "John, I think that is a capital idea, we have nothing to lose and if it works, I will owe you really big time."

Well the idea worked, and it wasn’t a fairytale, it was for real. The money came in by the gobs and the debts were paid, and there was even enough left for Louis to throw a party or two for his friends in the court. But wait!

The peasants, having lost all of their money, couldn’t pay taxes. They were thrown out of work, and the country went into a depression far worse than when John Law had originally been given his assignment. Louis became disenchanted with his erstwhile friend, while the people harbored grave ill feelings. John Law, a brilliant man who just hadn’t thought his plan through to its inevitable conclusion, was run out of town and died a pauper. You may know the plan he devised became know as the "Mississippi Scheme", which along with England’s "South Sea Bubble", almost drove Europe back into the dark ages.

IN THE BEGINNING

In spite of romantic tales, financial markets in this country did not suddenly spring from a Buttonwood Tree and begin its historic transcendence. As a matter of fact, its early beginnings were so uninspiring; almost no record was made of the events that transpired. A commodity market came into being sometime in the 1720s. This market dealt in everything but securities, but was primarily interested in the wheat and tobacco markets as well as the slave trade.

When the Revolutionary War ended, Alexander Hamilton, then Secretary of the Treasury called for a refunding of all debts incurred by the Continental Congress and the original colonies. This created a substantial excitement as the holders of this debt had all but written it off. At the same time, The First Bank of the United States was formed and began selling its stock primarily to insiders. It's massive run-up caused substantial interest within the country and the first touch of "stock market fever" infected the nation.

Seeing that there was a market for equities, the traders that regularly assembled at 22 Wall Street divided themselves into two groups. Those that wanted to continue in the commodities markets and the slave trade continued to hold fort at the same address while those interested in securities moved under the buttonwood tree located down the street at 68 Wall. These brokers agreed that they would not negotiate commissions and that they would only deal with each other. While business continued to be conducted under the tree for sometime, the erection of the Tontine Coffee House created a place for meetings, an alternative to the "street" when the elements were too severe for all traders whether commodity of security oriented.

For the next twenty years, business went on with little or no fanfare. It would not be until 1815 that the price of twenty-four securities was quoted on a regular basis in the daily paper. The list of company's whose stocks were traded in New York were primarily in the banking and insurance industries with a mixture of tollroads, tollbridges and canals making up the rest of the list. While stocks were not considered of great importance in New York, Philadelphia had created an extremely structured organization and was becoming very successful. A one-man delegation representing the equity brokers from New York was dispatched to Philadelphia to find out what they were doing wrong.

His report led to the formation of the New York Stock and Exchange Board which rented space at 40 Wall Street. Along with its new quarters, the fledgling exchange also created a constitution covering all facets of trading on the exchange and established an initiation fee of $25. This formalization did not immediately help business and the prime example of how lethargic trading was occurred on March 16, 1830 when only 31 shares changed hands, a record that has never been approached again.

However, a change was occurring and the country was starting to vibrate. People began believing in the nation's future and were looking for ways to participate in its growth. The railroads were expanding from east to west, opening up large chunks of the country as the expanded. Speculators were buying land the banks were financing their purchases. An awakening had occurred and Wall Street was going along for a speculative ride that would never end.

Along the way though, there were countless bends in the road and as a result of crop failures in the middle 1830s, land prices collapsed. If that wasn't enough, the Exchange burned down and had to move into a barn. In spite of the temporary setbacks, the trend was solid and sometime in the early 1840s, New York surpassed Philadelphia the center of the nation's now burgeoning securities industry. As evidence of its achievement, the New York Stock and Exchange Board hired a full time president, established telegraphic trading and saw its membership increase to 75.In 1848, the Exchange earned $1,079.

In 1854, the value of publicly traded securities surpassed $1 billion for the first time. The gold rush added to the carnival like atmosphere that the financial markets became accustomed to and without sound banking regulations, the market was soon flooded with money that added fuel to the fire. As with all booms there are the ever lurking busts and it occurred with gusto and for the first time and only time the Exchanges existences was threatened because thing became so bad. The underlying economic strength of the country remained intact though and the ship was soon righted. Railroad earnings were soaring and land values had recovered.

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