History Of The Stock Market Once there was a time when shares in business corporations were rarely bought and sold because few companies were considered promising financial profits (Blume 21).
That is hard to believe considering almost everybody has invested in some stock today. The stock market went through some distinct changes since its inception, and has evolved into a shaping force in the world today. There is one idea that sparked the fire which produced the stock market: capitalism. Everything the stock market is, and was, rooted in the basic idea of capitalism. Without that idea, stocks and bonds would never have come to be. Capitalism is an economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market (Peterson). When a person buys a stock, that means they own a part of the company in which they invested. The average person can thereby invest in a public company and receive a piece of that company’s success, or failure.
This process helps not only the smart investors, but the companies as well. The investors’ money must go somewhere, and that place is the treasury of the company they endorsed (Simonson).The company then uses that money for its financial needs, providing the company an income in addition to simple sales profits. Then, the investors make or lose money based on how much that company makes. Basically, people invest in an idea, and make money based on how that idea performs in the real world (Blume 35-39). While the stock market is based upon capitalism, this type of enterprise was shunned by the community in 1792 because of financial panic (Blume 23).
However, these practices were not shunned by all America in 1792. People wanted a way to trade stocks without the public stock auctions (which were banned because of lack of profits), so they tried something different than stock auctions. The institution we know today as the New York Sock Exchange began in 1792 as an effort to circumvent government regulation (Blume 21). Twenty-four..
stock brokers, with no building or even a formal title, met under a buttonwood tree on the north side of Wall Street.. (Blume 23) there they made a deal that went on to be known as the Buttonwood Agreement. In it were these words: We the Subscribers, Brokers for the Purchase and Sale of 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 a less rate than one quarter percent Commission on the Specie value of, and that we will give a preference to each other in our Negotiations (Blume 23). To these brokers’ great delight, their idea became very popular amongst investors and brokers alike. They bought office space on Wall Street, where the Buttonwood Agreement was made. That office space later went on to be called the New York Stock Exchange.They grew and expanded the Exchange so that it became the only place to buy stocks if a profit was to be made.
This system was a good one, but there were ways to beat it. Some of the outstanding financial powers of the United States often used their wealth to corner the stock market. All of these powers had monopolies in large business areas such as oil, steel, railroads and banking. The government tried to stop monopolies from forming by passing the Sherman Anti-Trust Act of 1890 (Blume 270).This did not stop these giants, however. They often engaged in financial battles for control of the market. In one of these instances, J.P.
Morgan and Harrimen both wanted control of the Northern Pacific Railroad Company in 1901 (Sharp 165). Harrimen decided to buy his way to majority share holder of the company, thereby allowing him to run the business. Morgan then bought all the outstanding stock available.This activity raised the stock price from $112 to $149 (Sharp 166). This increase caused people to sell the stock short (to sell it hoping it will go down before you buy it), but J.
P. Morgan had unexpectedly created a corner in the market and within hours the stock price had soared from $149 a share to $1,000. Since Harriman had sold short, he was now in debt $800 for every share he owned (Sharp 166).
There were big rivalries between other giants as well, showing how the market could be swayed so severely simply to fit ones needs. There were many similar struggles between men like Morgan and Carnegie for control of the steel business (Sharp 168). There have been too many battles over small railroads to count.All this led to one thing. In the late 1800’s and early 1900’s, the stock market was easily swayed, and cut-throat business was a way of life. Today we have laws against monopolies, market cornering, and other violations which greatly influenced the market.
However, it was not truly recognized that stricter laws were needed until the crash of 1929 (Blume 29). The free public market had become too free and out of control.Investing geniuses saw the evident crash coming, but they were powerless to stop it.
The brokerage business ended up being more of a free market where the good brokers could charge a higher commission and the less successful brokers would be paid a lower one (Blume 24). A few brokerage firms had an idea that would change the market, but not for the better. They decided to allow their investors to pay for only ten percent of the actual amount of stock they bought. Since many people could not afford to buy stock at its face value, the firm would put up ninety percent of the money, leaving the investors to pay a mere ten percent (Simonson).This set investors up for huge gains, because if the stock went up ten percent, the money the investor had put into the company doubled. There is a flip side to this money making wonder though.
What happens if the stock goes down even ten percent? A complete failure resulting in the investor being in debt to the firm with whom they conducted business (Simonson). That problem is exactly what caused the major market failure of 1929. The initial panic in 1929 carried the market some fifty percent lower and back to preboom levels.The slow grinding misery of the longest depression in the nation’s history worked the market ninety percent below its 1929 highs by 1932 (Sharp 210). The market only fully recovered after the start of Word War II.
This was not a good time in America, but there were a few good things that came out of it. One is that we have learned from our mistakes, and will hopefully not make the same mistake twice. The other prosperous idea was invented just before the crash. The smart investors knew that one must spread his holdings amongst a pool of stocks, just like the old phrase about never keeping all your eggs in one basket. They also knew that the riskier stocks gave far greater returns than the safer ones (Blume 95). These ideas paved the way for the invention of the first mutual fund, created in 1924. This allowed people to invest in one fund, but still spread their money over a wide variety of stocks, thereby creating a net to fall back on.
This was one idea that has survived until today and shows no sign of stopping.This notion helped lead the way for the prosperity that was to come. The next twenty years was a time of great prosperity due to low inflation rates and inheritance taxes (Simonson). However, the 70’s brought about a whole new era. The economy had grown too fast, causing ten percent inflation. This caused stocks to tumble. Real estate and fixed income became the prominent assets.
From the 80’s on, the market has enjoyed many years of prosperity, with the 90’s being the decade of largest market growth. However, none of it would have been possible if it weren’t for the lessons learned in the 1920’s (Brown 90-107). Learning from the past is very important, and a great example to learn from is the crash of 1929.
We caught the monopolies before they became too out of control, but failed to stop the small investor from driving the market down (Sharp 210). We must learn from history to make sure we never make the same mistakes that Wall Street made at the turn of the century. However, nobody can predict the future; with the rise of new types of stocks, online trading, and faster riskier trading, are we setting ourselves up for yet another fall? History.