The Historian's Perspective
The stock exchange on Broad Street, 1885 (GLC06353)
The Rise of an American Institution: The Stock Market
by Brian Murphy
On nearly every workday in the United States, if you watch cable news
or browse an Internet news site at 9:30 in the morning and 4:00 in the
afternoon (Eastern Time), you’ll probably see two utterly unremarkable
events covered live. More mundane than car chases on the California
freeway or cats stranded in Tulsa trees, the opening and closing bells
of the New York Stock Exchange—from an economic standpoint—signify
nothing. The bell rings, and trading begins. It rings again, and trading
ends. Except it doesn’t. There are other exchanges in other countries,
other U.S. cities, and even in New York itself. There are stock trades
that happen before 9:30 a.m. and after 4 p.m. Across the globe, billions
of things other than stocks have been bought and sold all day and night
for several thousands of years.
So why do news channels show us live video each morning of a smiling
and waving group of invited guests, standing on a marble balcony, pushing
a button and setting loose a frenzy of adrenaline, shouting, hand signals,
and confetti? What’s all the fuss about?
******
It wasn’t always this way. In contrast to its imposing flag-draped,
columned facade, and the nest of police barricades, bomb-sniffing dogs,
and metal detectors that have been in place since 9/11, the New York
Stock Exchange has far more humble origins. In fact, the Exchange didn’t
have its own building until the 1860s. The reason? The traders simply
didn’t need one.
When the Exchange was formally founded in 1792 by twenty-four brokers,
New York City wasn’t the center of finance in North America. That
distinction belonged to Philadelphia, where the action was along Chestnut
Street. Ships landed at the city’s port where merchants had goods
delivered to nearby warehouses, stores, or made arrangements to transport
and sell them within Pennsylvania or neighboring states. Before the
Revolution, British laws governing trade were strict yet were broken
frequently and flagrantly. Colonists were not allowed to start their
own banks, so urban and rural merchants conducted business face-to-face
or through intermediaries, paying each other with bills of exchange
and IOUs rather than gold or silver coins. Chestnut Street, located
close to the port, was the hub of this activity in Philadelphia, where
bills could be paid or traded, and cargo could be ordered, insured,
and shipped.
New York City had its own version of Chestnut Street, but it was a
far less busy place for most of the eighteenth century. Wall Street,
a brisk walk from Manhattan’s southernmost piers, was named for
the nearly 1,400-feet long defensive wall built there in the 1630s,
when the city was still a Dutch colony. By the time of the American
Revolution, the street was home to the city’s merchants and markets,
city hall, and slave pens. Agents, brokers, and auctioneers sold land,
livestock, and even lottery tickets here, crowding into the Merchants’
Coffee-House for twice-daily trading sessions and ongoing bartering.
Though the new nation was overwhelmingly agricultural and rural, America
in the 1780s was swept up in land and currency speculation. Americans
who lived hundreds of miles and a weeks’ travel from coffeehouses
hired agents in cities to buy lands even further away in the hopes of
turning profit. Revolutionary War veterans, paid in nearly worthless
“Continental” dollars, traded in their paper to more wealthy
speculators who hoped the government would eventually honor the wartime
money at face value.
Both of these forms of investment got a boost from the national government
created by the Constitutional Convention of 1787. The Washington administration
and its treasury secretary, Alexander Hamilton, were eager to raise
money by selling empty land in the West, hoping to pool enough money
to repay hefty war debts to France and the Netherlands. Hamilton’s
controversial national finance plan called for the creation of a national
bank that would have branches in major American cities—including
New York—and offered to buy back Continental dollars at full-face
value. War veterans who sold their Continentals in tough times were
outraged; Thomas Jefferson supported the bank only in exchange for Hamilton’s
agreement to move the nation’s capital from New York to northern
Virginia, briefly stopping in Philadelphia while the capitol and president’s
house were under construction.
Though New York lost out on being the nation’s capital, Hamilton’s
plan strengthened the hands of the city’s stockbrokers. Continental
dollars were converted into U.S. bonds, and the state of New York chartered
the Bank of New York in response to the opening of the Bank of the United
States. Long frustrated with being dominated by the city’s officially
licensed auctioneers, New York’s brokers saw an opportunity to
seize the trade in U.S. bonds and bank stocks.
Tired of operating out of the busy Merchants’ Coffee-House,
the brokers formed the Tontine Association in 1790 to build a new coffeehouse
for themselves. Gathering 203 members who paid $200 for a share of ownership
(and profits), they began construction on a building in 1792 at the
corner of Wall and Water Streets in lower Manhattan. The Tontine Coffee-House
would become a place where people could not only drink coffee, but also
buy, sell, and learn about the market prices for coffee, tea, spices,
land, and other commodities, in addition to shares of the city’s
two banks and three types of U.S. bonds. Of all the hundreds of things
bought and sold at the Tontine in the 1790s, just five were securities.
******
Yet before the Tontine Coffee-House was finished, the brokers took
the even more important step of parting ways with the city’s licensed
auctioneers. Speculation had become so fiercely competitive in the 1780s
and early 1790s that the brokers saw auctioneers as having an unfair
advantage due to their official recognition by the city and their twice-daily
sales in the morning and afternoon.
Meeting under a buttonwood tree on Wall Street, where they often were
forced to do business when the coffeehouses became too packed, twenty-four
of the city’s most prominent brokers agreed to separate themselves
from the rest of the pack. On May 17, 1792 they signed the Buttonwood
Agreement, forming the core of the New York Stock and Exchange Board.
“We the Subscribers, Brokers for the Purchase and Sale of the
Public Stock, do hereby solemnly promise and pledge ourselves to each
other, that we will not buy or sell from this day for any person whatsoever,
any kind of Public Stock, at least than one quarter of one percent Commission
on the Specie value and that we will give preference to each other in
our Negotiations.” They pledged to deal only with each other—cutting
out auctioneers—and to set a minimum commission rate. The New
York Stock Exchange, therefore, was born from a desire to set up a rival
guild and to wring a profit from the quickly growing trade in stocks
and bonds.
Before construction on the Tontine was finished, the Buttonwood brokers
operated out of a rented room at 40 Wall Street, the future headquarters
of the Bank of the Manhattan Company and just around the corner from
the NYSE’s present-day address. Yet the action remained on the
streets, where members of the Exchange traded securities until they
were prohibited from doing so in 1836.
******
While there may have been only five securities traded in 1792, by the
end of the decade hundreds of companies sought investors to back plans
for roads, bridges, canals, mines, furnaces, and factories. Most of
these early corporations went bust, but the demand for capital only
grew. Once New York had its third bank, in 1799, it quickly got its
fourth in 1803 and dozens more soon after. Hamilton’s bonds traded
alongside stocks for Hamilton’s banks long after Aaron Burr shot
Hamilton in their 1804 duel.
After the War of 1812, even more war debts were introduced to the nation’s
economy, and once the Erie Canal started carrying trade to New York
City from the state capital in Albany and far-off cities in Ohio and
the West, Manhattan eclipsed Philadelphia as the financial center of
North America. With a deep-water port that didn’t freeze in the
winter and offered access to European banks and Asian goods, New York
City was the place to raise and invest money. The Stock Exchange began
holding more formal trading sessions in the mornings and afternoons,
which started when the president would stand up and read the name of
each security to be traded that day. In 1817 the Exchange adopted its
own constitution. By the time the Erie Canal opened in 1825 (financed
by the New York Stock and Exchange Board bonds), the Exchange had already
hit an annual trading volume of more than 380,000 shares. With the western
territories open to New Yorkers via the Erie Canal, Manhattan became
ever more important in national finance. Trades on the exchange increased
to 8,500 shares per day by 1835—fifty-times what it had been in
1828.
The increased importance of the Exchange also meant that it could predict
the first signs of trouble. When the Panic of 1837 struck, daily trades
plunged from 7,400 per day to just over 1,500. In the Panic of 1857,
one insurance company shed 15% of its value in a day. Technology that
made it possible to gather and share information via the telegraph,
ticker, and the transatlantic cable also heightened the risks in the
economy. And in response, the Exchange—formally renamed the N.Y
Stock Exchange in 1863—began requiring companies to disclose financial
information, operate with more transparency, associate with local bankers,
and issue annual reports. In 1886, the Exchange saw its first day where
more than a million shares were traded.
In 2010, that number tops 3.35 billion per day. More people than ever
own stocks, and are affected by the rules and practices that began in
1792 under that buttonwood tree.
Brian Murphy is a professor of early American economic
and political history Baruch College of the City University of New York.
