Eyewitness to Wall Street
  David Colbert
  Hardcover
  $30.00
  ISBN 07679-0660-8
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Though New York was an important city for stock trading, Philadelphia was the real financial leader in the colonies and the early decades of the U.S. It was home to the biggest banks–including the all-important Bank of the United States, which enjoyed a special federal charter–and of important financiers such as Robert Morris, Stephen Girard, and Nicholas Biddle. Needing to communicate between the two cities quickly to avoid or take advantage of price differences between the two markets, traders created an elaborate system of signal towers. From Wall Street the signals traveled across the Hudson River to New Jersey and then into Pennsylvania. Information took about 30 minutes to travel the 90 mile route.

To "corner" a currency or commodity is to buy all or almost all of the supply, using the rules of supply and demand to drive the price up sharply. Then one sells a bit at a time to make a profit.

In the 1600s, for lack of hard currency from England to make trade fluid, colonists often relied on wampum–beads that were carefully crafted from shells. Because the labor required to make the wampum was fairly constant, the value didn’t fluctuate. But a savvy New York City merchant achieved the first "corner" of a financial market in America by hoarding and burying barrels of wampum beads. The beads became so scarce their value rose 400 percent.

New York City was the first capital of the U.S. That’s where George Washington was inaugurated in 1790–steps away from the current home of the New York Stock Exchange. But in an extraordinary deal the leaders of New York City and Philadelphia traded the prestige of the capital to Virginia. In return, Virginia agreed that the federal government could borrow money from financiers–who were mostly from New York City and Philadelphia, of course–to pay off debts incurred during the Revolutionary War.

The deal was very profitable for Wall Street. The financiers not only lent the money at a stiff interest rate, they spread rumors that the Revolutionary War IOUs would never be paid, then bought them for pennies on the dollar before news of the deal reached citizens. And those government bonds were among the very items available for trade during Wall Street’s early years.

England did not like its hard currency (i.e., coins) to be exported. This made trade in the colonies difficult. A businessperson had to rely on paper money that might be counterfeit or backed by insufficient assets to cover the face value, or accept barter. So Spanish dollars, minted in Spain’s American territories, became generally accepted currency even in the British colonies. These coins were worth eight reals and were often cut into eight pieces to create change (hence the term "pieces of eight" and the phrase "two bits" to mean 25 cents). The practice of quoting prices of most commodities in eighths became common.

Until then, individual banks all over the country printed their own banknotes. More than confusing, it was a boon for counterfeiters. (Regular newsletters warned merchants and bankers of the latest forgeries.) In 1862 the famous U.S. "greenbacks" were created by Secretary of the Treasury Salmon P. Chase, to simplify financing the war. The first currency was $1 bills, bearing Chase’s portrait.

Oddly, after becoming Chief Justice of the Supreme Court after the war, Chase ruled the new currency unconstitutional. A later decision overturned Chase’s odd ruling and allowed it to remain in circulation.

One fact about the "greenback" paper money issued by the US during the Civil War scared people: it could not be redeemed on demand for gold. Though no one in our era expects to redeem paper money, back then gold was often needed for business transactions. As a result, an informal "gold exchange" immediately sprung up on Wall Street, allowing traders to speculate on the price of gold vs. greenbacks. When the Union won a battle, the greenbacks rose in price, because their value and safety increased. When the Confederacy won, the greenback dropped.

Because of the money at stake, speculators developed better communications than the government enjoyed. To Lincoln’s constant resentment, he learned battlefield news after the traders.

In 1882, Charles Dow, along with partner Edward Jones, founded the Customer’s Afternoon Letter. Two years later, Dow presented his first "average." Reflecting the economy of that age, Dow selected nine railroads, a steamship line, and the Western Union telegraph company. Industrials weren’t trusted blue-chips. The first industrial stock, American Sugar, was added in 1894. By then the Customer’s Afternoon Letter had been renamed The Wall Street Journal. Dow first created a list of industrials in 1896, selecting twelve stocks: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American Company, Tennessee Coal & Iron, U.S. Leather, U.S. Rubber.

Only General Electric remains in the list today.

The Federal Reserve system, established in 1914, effectively controls the money supply and interest rates. But, though "authorized" to distribute currency, the banks are not owned by the government nor controlled by the U.S. Treasury department. Each regional Federal Reserve Bank is owned by the local private banks who are members of the Federal Reserve system. A federal Board of Governors, including the Chairman of the Federal Reserve is appointed by the President to oversee the banks.

Insider trading is simply trading using knowledge that is not known to the general public. Publicly-traded companies are now required by law to provide important information to everyone at the same time. A lot of effort goes into making this happen, though often one can look back over the few days before news breaks and see that some individuals–both within the company and outside it–had the news early.

Trading on inside information was considered prudent for centuries. But the country was outraged when government investigations after the 1929 stock market crash revealed that many top executives profited from insider knowledge while making public statements contrary to the information. In 1934, when many new securities laws were written, insider trading was outlawed. So in the 1980s traders like Ivan Boesky pled guilty to crimes that were once acceptable practice.

Though much of their business was the stocks and bonds issued by corporations, it was considered inappropriate for the trading firms themselves to incorporate or issue stock. Instead, they operated as partnerships. Finally, in 1953, a member firm of the New York Stock Exchange became Woodcock, Hess & Co., Inc. Yet it was still a shock to the community in 1970 when Donaldson, Lufkin & Jenrette sold shares of its stock to the public. Now, of course, financial companies are considered just another sector of the market. Even the conservative partnership Goldman Sachs sold shares on the market a few years ago.

Copyright © 2001 by David Colbert