Wall Street by Charlie R. Geisst

April 24, 2008 at 6:18 pm Leave a comment

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.

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Entry filed under: Economics and Finance, History.

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