2-02 A History Lesson – Wall Street
Wall Street” is a street in New York City, near the southern end of Manhattan Island. It is the home of the New York Stock Exchange, and the biggest center of stock trading and finance in the world.
The first European colony in what we now know as New York was actually dutch – the city’s original name was New Amsterdam.
New Amsterdam was tiny by today’s standards – just a few streets and farms on the corner of Manhattan Island. To protect this small community, the Dutch East India company built a 12-foot wall at the edge of the town in 1653. Along this wall ran a street – which they called “Wall Street” until they could think of something better (hint: they never did).
Over time, New Amsterdam became New York, and the city expanded rapidly. Even after the wall was torn down to make room, the street was called “Wall Street”, and became part of the heart of the new business district of the town.
Wall Street and the United States
Wall Street also had an important government function: in 1700, a new City Hall for New York City was built on Wall Street. As the American Revolution drew near, this building was also where the Freedom of the Press was established (with a lawsuit of the British government against a newspaper printer for libel, he was found not guilty because what he published was true), and where delegates from 9 of the colonies met to draft a letter to King George and the British Parliament in response to the Stamp Act, making the famous claim of “No Taxation without Representation”.
After The Revolution
During the American Revolution, the colonial governments sold bonds to finance the war effort. Investors bought these bonds, but nobody was completely sure if the new government would ever be able to pay them back. This led to investors buying and selling the bonds among each other based on how likely the government was going to pay them back – sellers thought the new government was bankrupt, buyers thought they would pay at least SOMETHING back.
In our example earlier in the chapter, we talked about 10 buyers and 10 sellers getting together in a room to make some trades. This is not very far off from where everything started – a small group of businessmen would meet occasionally at the intersection of Broad Street (named “Broad Street” because it was wide – not a lot of creativity with the early city planners) and Wall Street under a buttonwood tree to buy and sell bonds based on the latest news of the day and how likely they thought the government would be able to pay them back. This location made sense – the old City Hall was made into the Federal Hall – capital of the United States for about 4 years (from 1785 until 1789), so these businessmen were just a few blocks away from where government policy was being decided that would determine if these bonds would ever get repaid.
A few of these businessmen also started trading stocks with each other from early American companies, like the Bank of New York – starting a trend of stock trading too.
The New York Stock Exchange
In 1792, 24 of the businessmen that were meeting under the buttonwood tree decided to set down some formal rules, creating the Buttonwood Agreement. This agreement founded what we now call the New York Stock Exchange. A few years later in 1817, the group of investors continued to grow, and were tired of standing out in the cold and rain to do business. They rented the building across the street, which became the first New York Stock Exchange proper.
During the 1800s, the industrial revolution began sweeping across the country and the NYSE was at the center of financing its growth. Thousands of businesses were started and needed access to cash to finance their growth. Many of them sold stock on the NYSE to raise capital to build factories and expand. The first half of the 19th century also saw a huge boom in canal building; canal construction was financed usually partly through government funding (which was raised by selling bonds) and by selling stock in the canal companies to investors (which was sold in stock that paid dividends based on the canal tolls once completed) – both the bonds and stocks were traded on the New York Stock Exchange. By the 1840s, canal companies were replaced with railroad construction, which was almost entirely funded by the sale of stock.
The Railroad Boom
It was during the railroad boom that the NYSE transitioned from being centered around bond trading to being mostly focused on the buying and selling of stock. However, it was not just because of the railroads that this transition took place: the invention of the telegraph allowed the news of stock prices to reach investors immediately, rather than waiting for newspapers and other publishers to compile lists at the end of the day or week (which often would not include anywhere near all the stocks currently on the market). This also allowed buyers and sellers across large distances to trade relatively easily, since it could be done through brokers in respective cities who specialized in trading.
The industrialized companies with their huge growth (and so potentially very valuable stocks) where the biggest reason investors on Wall Street began to move into stock trading rather than bonds. With a bond, the yield is usually based on the likelihood that whoever is borrowing the money will “default” and fail to pay it back. Stock prices are based on the expected future profits of the business they represent ownership of. Before the industrial revolution, most businesses outside of very large trading organizations grew very slowly and usually did not issue any public stock at all. For most investors, buying bonds was either risky (because of a risk of default) or had low yields, and was the only option available. Industrial companies often promised big growth and big profits and were eager to sell shares to the public to raise capital quickly (so they could start business faster), encouraging new investors to take part. The huge boom of growth in canal and rail stocks carried over to other industries and has grown ever since.
The NYSE Today
The NYSE is still the largest stock exchange in the world and will likely continue to be for an exceptionally long time. Traders from around the world still meet to trade on the NYSE floor, but as more and more trading by large financial firms is done completely electronically, and more individuals are trading stocks using their online brokerage accounts, the NYSE and Wall Street act as a global symbol for investment and the financial world.
In the United States, there are also some other major stock exchanges you should be familiar with:
NASDAQ as we know it today was created as an “electronic exchange” in the 1970’s to improve how quickly bid and ask information could be communicated to investors (at this time, the NYSE was still basically a room full of men yelling orders at each other with 2 phones in each hand).
In 2007, it merged with the smaller Philadelphia and Boston stock exchanges. NASDAQ heavily, but not exclusively, features technology-based stocks (like Google, Amazon, eBay, and many more).
Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE)
The main financial exchange in Chicago used to house the Chicago stock market, but since stopped stock trading in favor of other securities. Today, the Chicago exchange is the world’s largest exchange for commodities through the CME and option contracts through the CBOE.