Wall Street by Charlie R. Geisst

This book was written in 1997 by Charlie Geisst, and does not cover any events after 1996. It is very difficult to summarize a history book, and in many cases it is probably useless, but I have attempted to focus on the beginnings of Wall Street for those who are interested in getting a very basic understanding of financial history in the United States.

Pre-Revolutionary Era
British and Dutch traders developed lucrative businesses, utilizing American land, food, furs, and minerals. European stock exchanges had existed for a century, but America lacked its own exchange.

Post-Revolutionary Era (1790-1840)
The US issued $80 million of federal government bonds. This bond market was formed as merchants gathered around Wall Street. Corruption was a problem, and in 1792, dealers and auctioneers agreed to establish a structured exchange. This was not enough to solve the problem of predatory practices.

After the War of 1812, transportation (canals and railways) emerged as the first US growth industry.

Survival of the Fittest (1840-1870)
Volatility was extremely high during this period, and the wealthy dominated wall street. These wealthy people did, however, finance the War of 1812, the Mexican War of 1846-1848, and the Civil War. In 1841, The Mercantile Agency was established as the first watchdog firm on Wall Street

The Robber Barons (1870-1890)
Railroad and Telegraph expansions continued after the civil war, and the first transatlantic telegraph was operational in 1866. In this time of great speculation, a few Americans (Carnegie, Rockefeller, Vanderbilt, etc.) became extraordinarily wealthy due to consolidations in American industry. By 1900, their stranglehold had turned Wall Street into a cartel.

Trusts (1880-1910)
In 1882, members of the oil industry gave up their shares for certificates issued by Rockefeller’s Standard Oil. As Standard Oil took over small companies in the same industry, it grew in size and influence. These trust certificates were then traded on stock exchanges. Some other companies to emerge as trusts in their respective industries were AT&T, General Electric, and American Tobacco Co. By 1900, stocks were more favorable investments than bonds, and the banking system was in danger due to the lack of regulation.

Money Trusts (1890-1920)
In 1913, the Federal Reserve was established to act as a lender of last resort. It maintained a good relationship with Wall Street until Louis Brandeis spoke out against money trusts such as J.P. Morgan. He spoke out against the close relationship between investment and commercial bankers.

In 1917, $21 billion of liberty loans were issued as a result of World War I. This was a first for many Americans, who had never owned appreciating intangible assets. It helped increase the public trust of government and investment bankers. Money trusts still existed, but they were less conspicuous.

The Roaring Twenties (1920-1929)
After World War I, inflation was low and productivity soared to record levels. Although there was a high income tax rate, people were still spending at record levels. Between 1925 and 1928, the market rose 200%, and many people were buying stocks on margin as a standard practice. In 1929, the market reached a top, and when sales began to slow in September, investors began selling en masse, calling prices to tumble downwards. By October, many investors had lost all of their money. Values had decreased by almost $15 billion.

The New Deal (1930-1935)
National income was down 30%, savings were down 50%, unemployment rose to 16%, and new housing was nonexistent. Companies were no longer loaning money, and on the political front, the Democrats regained control. Wall Street wrote the period off as “another recession.”

The following proposals were enacted by the Roosevelt Administration:

• The Emergency Banking Act of 1933: Provided for Federal Bank Inspections
• Glass-Steagall Act: Separated Investment from Commercial banking, and provided insurance for depositors through the FDIC
• Securities Act: Regulated the securities market by the SEC
• Federal Housing Administration (FHA): Mortgage loan guarantees were provided

Recovery (1936-1954)
The National Association of Securities Dealers, which was responsible for overseeing securities exchanges, was born in 1937 as part of the Maloney Act. The Federal Reserve was given the power to control the interest rates during World War II. Markets slowly recovered after the war. New stock issues dramatically increased, but corporate bond issues remained low and inflation was alarming (15% in 1946).

In 1947, the Justice Department filed a law suit against 17 investment banks for monopolizing the industry, but the case was dismissed in 1953. From then on, i-bankers were considered vital to the economy.

The Bull Market (1954-1969)
During these 15 prosperous years, US industries spent billions of dollars overseas, and the US became a creditor nation. However, interest rates and inflation were a problem. The use of credit cards began in the 1960s, and mutual funds began to emerge in numbers.

The Bear Market (1970-1981)
A complex series of events occured during the Nixon Administration:

• Nixon froze wages and prices for 90 days and cut the dollar away from the gold standard
• Investors began selling dollars on the foreign exchange markets, leading to high inflation.
• In 1973, a tipping point occurred when OPEC sharply increased the price of oil, causing a recession.
• Stocks declined while bond yields and short-term interest rates increased.

Mergermania (1982-1996)
During the period known for its scandals, many new securities were issued by numerous governmental and non-governmental entities. Underwriting (loans based on property value) increased and the bond market was healthy. The increase in corporate profits sparked new capital investments.

Interest rates hit a bottom in 1985, and in 1987, fear that interest rates would skyrocket caused a collapse. On October 19th, the Dow fell 22.5%. After hitting rock bottom, the crisis was over, and at the end of 1987, the market ended slightly ahead. A bull market began that, in the 1990s, became the largest in Wall Street history. Mergers increased, and in 1996, there were 5000 registered funds in existence. This brought about the gradual disappearance of the line between commercial and investment banking.

The World Is Flat by Thomas L. Friedman

The platform for delivering content from anywhere to anywhere is what The World is Flat is all about. This book provides an understanding of how the world has become so small, in essence flat, and what the implications of this are for countries, companies, and individuals.

Part I: Waking up to Globalization 3.0

• Globalization 1.0 (1492-1800): Columbus opens trade between the Old World and the New; shrinks the world’s size from large to medium.
• Globalization 2.0 (1800-2000): Multinationals, led by the expansion of Dutch and English joint-stock companies, and then by the Industrial Revolution shrink the world from medium to small. Integration is first powered by decreasing transportation costs and then falling telecommunication costs.
• Globalization 3.0 (around the year 2000-): This is not only the world shrinking from small to tiny, but also flattens the playing field as individuals, rather than countries or companies, collaborate and compete globally. It is driven by a diverse spectrum of non-Western people of color rather than by white Europe and America.

Because of the automation of everything, the gains in productivity promise to be staggering for those who can absorb the technology. And more people than ever before are going to have access. The convergence of 10 major flattening forces will create new social, political, and business model.

Flatteners

1. 11/9/89: Not only did the fall of the Berlin Wall unleash forces that ultimately liberate the captive populations of the Soviet Union, it tipped the balance of power, worldwide, toward those advocating democratic, consensual, free-market-oriented governance. The period from this date until the mid-1990s was the age of “My machine and I can now talk to each other, better and faster, so that I can do more tasks. Moreover, my machine and I can talk better and faster to a few friends, and some other people in my company, so that we can become more productive.” True seamless global communication isn’t here yet, but on the horizon.
2. 8/9/95: Netscape goes public and the world is never the same. The PC-Windows phase begets the Netscape email-browsing phase - begets the reality that “My machine and I can interact (i.e. email) with anyone, anywhere, on any machine, and my machine and I can interact (can browse) with anybody’s Web site on the Internet. This lays the foundation for #3.
3. Work Flow Software: It didn’t take long before everyone wanted to do more than just browse and transmit email, instant message, send pictures, and listen to music over the Net. They also wanted to create, sell, and buy goods and services, keep track of inventories, read X-rays - and they wanted it ubiquitous. However, for this to happen, the flattening process had to go up another level: new application software was needed. The development of XML, a data description language, and SOAP, its related transport protocol, allowed digitized data to be exchanged between diverse software programs so that the data could be shaped, designed, manipulated, edited, reedited, stored, published, and transported and it didn’t matter where the individuals were or what computing devices the were connecting through. The new global platform had empowered entirely new forms of collaboration, which constitute the next six flatteners.
4. Open-Sourcing: The open-source movement involves thousands of people, worldwide, coming together online to collaborate in writing everything from their own software and operating systems to dictionaries and recipes. Apache, a shareware program for Web server technology, is a prime example. Its collaborators set out to solve a common problem - Web serving - and discovered that collaborating for free in this open-source manner was the best way to assemble the best brains for the task. Apache, which powers about two-thirds of the Web sites in the world, is one of the most successful open-source tools available. Determining that is engineers could no better than this ad-hoc initiative, IBM threw out its own technology and decided to incorporate Apache into its own new Web server product, Websphere. The free software movement is another increasingly popular form of self-organized cooperation, in that it relies on open-source collaboration to help produce the best software possible, for free distribution.
5. Outsourcing: During the late 1990s the Y2K computer issues became the Y2K crisis! And, India, with all its technies, from all those IITs (Indian Institutes of Technology), private colleges, and computer schools, was the one place in the world with enough software engineers to do it. The initiative became a tremendous flattener. Using fiber-optic-connected workstations, any service, call center, business support operation, or knowledge work, which could be digitized, could also be outsourced globally to the cheapest, smartest, or most efficient provider. This discover made Indian IT providers greatly respected, and outsourcing from the US to India exploded.
6. Offshoring: Beginning in the 1980s, many investors, who knew how to operate in China, began to realize that, though they could not effectively sell many things to that market at the time, they could use China’s labor pool to make things and sell them abroad. And so it became that the only way companies could compete was taking advantage of China’s low-cost, high-quality platform. In 2001, China formally joined the WTO, agreeing to adhere to international law and standard business practices. A process has been created in which countries now scramble to see who can give companies the best subsidies tax breaks, and education incentives, in addition to the cheapest labor. This has been great for the consumer.
7. Supply-Chaining: When a Wal-Mart cashier scans and item for purchase, a signal is transmitted across the Wal-Mart network to the supplier’s factory (whether in Maine or coastal China). A replacement item is manufactured and then shipped back to the originating Wal-Mart store, via the Wal-Mart supply chain, and the whole cycle starts all over. Wal-Mart’s ability to orchestrate this “symphony” on a global scale - moving 2.3 billion general merchandise cartons annually along its supply chain - is the most telling example of supply-chaining. Supply-chaining, a method of collaborating horizontally among suppliers, retailers, and customers to create value, is both enabled by the world’s flattening and a hugely important flattener in its own right.
8. Insourcing: If an individual owns a Toshiba laptop, which breaks while under warranty, Toshiba will advise the customer to drop the laptop off at a UPS store to be shipped for repair. However, UPS does not deliver the laptop to Toshiba, but actually has it sown Toshiba-certified repair personnel fix the computer in a UPS-run workshop, dedicated to computer/printer repairs. With this process, UPS is not just delivering packages anymore - it’s coming right inside a business. This new form of deep collaboration and horizontal value creation is a unique new flattener. When a huge conglomerate can get packages delivered or goods repaired quickly anywhere in the world, it can act really small. And, when small businesses, or individuals working at home, can act big, the competitive playing field is leveled even more.
9. In-forming:In-forming is “the individual’s personal analog to open-sourcing, outsourcing, insourcing, supply-chaining, and offshoring.” It is the ability to build and deploy one’s own personal information-knowledge-entertainment supply chain. It’s about “self-collaboration” - becoming one’s own self-directed, self-empowered researcher, editor, and selector of said information, knowledge, and entertainment without having to go to the library, the cinema, or watch network television. And, it’s about searching for knowledge and like-minded people and communities. Google shows how hungry people are for this form of collaboration with the number of daily searches is processes. Never before have so many people had the ability to find so much information on their own, about so many things, and about so many people. Google CEO Eric Schmidt say, “[If the flattening of the world means anything, it means] there is no discrimination in accessing knowledge.” The flatter the world become, the more transparent and available ordinary people become. In a flat world, no one can run and no one can hide.
10. the Steroids: Friedman calls certain new technology steroids because they amplify and turbocharge all other flatteners. All steroids are going to amplify and further empower all the other forms of colaboration: Open-source innovations should become more open; Outsourcing will be enhanced because it will be so much easier to collaborate; Supply-chaining will be enhanced because headquarters will be able to connect in real time with everyone; Insourcing will be enhanced because every driver carrying his or her own PDa, will be capable of interacting with a company’s warehouses and every customer; and In-forming will be enhanced via every individua’s ability to manage his or her own knowledge supply chain.

Friedman contends that the most important force shaping global economics and politics in the early 21st century is a convergence of new players, on a new playing field, developing new processes ands kills for horizontal collaboration.

Unfortunately, this convergence has been obscured by another convergence. First, because many people equated the dot-com boom with globalization, when the bust came, and so many dot-coms imploded, the assumption was that globalization was imploding as well. “This was pure foolishness,” says Friedman, who believes, unequivocally, that the bust actually drove globalization into “hypermode” by forcing companies to outsource and offshore more and more functions in order to save scarce capital. In other word, the dot-com bust was a key factor in laying the foundation for Globalization 3.0

And then everything came to a half with 9/11, subsequent Afghanistan and Iraq invasions, Enron, Tyco, and WorldComm corporate scandals. Thus, the world’s flattening and reshaping were not part of the public discourse in the U.S. or Europe.

Part II: Globalization 3.0 - The Great Sorting Out

The world’s movement from what was primarily a vertical value-creation model to what is increasingly becoming a horizontal model, has affected everything. Friedman views flat and frictionless as a mixed blessing. It may be good for global business. But, it may also pose a threat to the distinctive places and communities that give people their identities and locate them in the world.

In the flat world, one person’s economic liberation could be another’s unemployment. The author contends that there is almost nothing about Globalization 3.0 that is not good for capital. If Dell can build all of its computer components in coastal China, and then sell them in the U.S., Dell benefits. Its stock does well, its shareholders do well, its American customers do well, and the Nasdaq does well; however it is difficult to say that American labor does well.

Essentially, management, shareholders, and investors, whose primary concern is sustainability, are largely indifferent about where their profits are found or even where employment is created.

As the world becomes flatter and flatter, the more it will need a system of global governance that keeps up with all the new legal and illegal forms of collaboration. “Who owns what?” is sure to emerge as one of the most contentious political/geopolitical questions of the century, especially if more and more American firms begin to feel ripped off by more and more Chinese enterprises, taking advantage of the newly flattened world.