The Corner

by Bart Ward

Before New York, the financial center in the U.S. was Philadelphia. Boston was also a place where banking and trading took place. There are considerable doubts as to when the first securities market in New York began to function. Some dealings in securities were probably transacted as early as 1725. It is well known that the merchant class was made of English and Dutch. The Dutch, like today, were known to be some of the great traders of the time. In fact, one of the reasons they sold the island of Manhattan, was because they were inherently not imperial. They would have rather had the money to trade with, than the land.

The English and Dutch operations grew out of an auction market in lower New York at the foot of Wall Street. The market dealt in commodities, such as furs, wheat, fish and tobacco, natural resources and securities; even slaves were bought and sold until 1788. Land was another area were speculative activities occurred. Certainly, at the time, the market for stocks was of little importance, especially because there were far more issues of bonds than stocks at the time.

As a side note, Peter Stuyvesant (the last Dutch Director-General of the colony of New Netherland) built a barricade to protect the early Dutch settlers from local Indians and wild animals in lower Manhattan. In 1685 the area was surveyed and what would become Wall Street, was laid out along the original barricade that Stuyvesant built.

The first New York dealers in securities were not brokers so much as they were merchants and auctioneers. Trading in securities did not become a specialty of those men until speculation in government securities began in 1790. Trading was well known to take place in favorite watering holes such as the Tontine Coffee House. According to Steven Wheeler, director, Archives, Corporate Giving and Education at the NYSE; “[The Tontine] opened in 1794 at the corner of Wall and Water Streets, the Tontine Coffee House was the center of commercial activity in New York City. Despite the obvious purpose in its name, the Tontine Coffee House was established as a merchants’ exchange—a place where merchants and brokers could meet and trade goods with one another. It was conveniently located just a block from the East River piers where cargoes from around the world arrived in port, as evidenced by casks, barrels and crates stacked up in the street in front of the building. Stockbrokers met there regularly to trade stocks and bonds into the early years of the 19th century.”

The New York securities market first achieved prominence when the federal government was established. Alexander Hamilton, who was very involved in financial affairs of the time, was selected as the first Secretary of the Treasury. In his “Report” of January, 1790, he recommended that the newly created government fund all of the Revolutionary War bonds, those of both the Continental Congress and the 13 colonies.

Second only in importance to the speculation in war bonds was the stock of the First Bank of the United States. This bank, chartered in 1791, issued stock at $100 a share. Immediately, great interest developed in its shares, not only among financiers and brokers but also among public officials. Within a year a share had climbed to $195; before over-speculation caused it to crash to $108 within one month. As with any crash, indignation ran high as the large profits of market operators and politicians became known.

The earliest mention of any definite market for stocks in the newspapers is to be found in the Diary, or Loudon’s Register, published in New York in March of 1792. A brief item on that date indicated that dealers in stock met each noon at 22 Wall St.; sales were conducted by a joint arrangement of auctioneers and dealers. New York at that time boasted one privately chartered bank, the Bank of New York, founded by Hamilton; the city’s population was only 35,000.

These early traders were eventually divided into auctioneers and dealers as their operations were held near the street and in coffeehouses. The auctioneers set the price of securities and dealers traded between themselves and others. Their operations were based on European bourses such as those in London, Amsterdam and Antwerp. These areas of Europe were where advanced mercantilist trading companies operated, with the Dutch East India Company issuing the “first printed share.” It was natural for traders in America to develop markets based on the European model.

The commodity dealers and the securities brokers now began to separate; the latter took up trading under a buttonwood tree at 68 Wall St. Eventually, the brokers became tired of the monopoly of the auctioneers who sold the stocks and sought to create an organization of their own. In March 1792, they drew up and approved in bold script the first document in the history of what was later to be the New York Stock & Exchange Board. Its text was short; its intent unmistakable. This newly formed market was far more structured than in the past and did not have the speculative and manipulative operations of prior markets.

In brief, the agreement had two provisions: (1) the brokers were to deal only with each other, thereby eliminating the auctioneers, and (2) the commissions were to be one quarter of one percent. The agreement is known as the “Buttonwood Agreement” and today that exchange is known as the New York Stock Exchange.

Quote of the Week: “Purely in retrospect it is easy to see how 1929 was destined to be a year to remember. It was simply that a roaring boom was in progress in the stock market and, like all booms, it had to end.”— John K. Galbraith

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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