The Birth of Wall Street

So far, we have watched how speculative bubbles shook the cities of Europe. It is the story of how tulips, and then the share certificates of bubble companies, briefly stripped people of their reason. In time, the stage moved across the Atlantic to the New World—a young United States, only recently independent. There, as yet, neither an orderly financial system nor a trustworthy form of market had taken shape. In this chapter, we follow the story of a market that began with a small agreement struck beneath a single tree and grew vast alongside the steel arteries of the railroads, tracing both its dazzling prosperity and the shadow that is so easily overlooked.

Beneath a Single Tree: The Buttonwood Agreement

The story begins with a single bout of chaos. In early 1792, the young American securities market is said to have collapsed in the wake of one man’s failed attempt to manipulate prices, suffering its first financial panic. The speculation that had tried to inflate prices burst, promises went unkept, and credit itself fell to the ground. Amid the turmoil, New York’s leading brokers reflected: at this rate, no one will trust the market any longer.

And so, in the spring of that same year, twenty-four brokers are said to have struck the agreement later known as the Buttonwood Agreement. The name is said to derive from the tradition that it was signed beneath a single buttonwood tree standing on Wall Street. Its contents were very brief: to give one another priority in trading among themselves, and to keep commissions at a fixed rate—that was all. And yet, in this plain promise dwelt the very essence of what a market is.

It was an internal discipline of ‘trading only with those you can trust.’ Rather than anyone buying and selling as they pleased, a set membership faced one another under set rules. What people sought after the chaos was not flashy profit but, first of all, order. In time this gathering refined its rules and took on the form of an organization. The verbal promise beneath a single tree thus grew into a modern securities exchange.

Steel Arteries: Railroad Shares and American Capitalism

What enlarged the market all at once was the railroad. Nineteenth-century America held a land that stretched endlessly from east to west. The only means of binding that vastness together was the railroad. Yet laying even a single line of track, or fitting out even a single locomotive, required staggering capital. No single magnate, no single bank, could possibly bear it alone.

Here the mechanism of the share came into its own. Railroad companies issued shares and gathered capital, little by little, from countless investors. Each investor held, in the form of a share certificate, a part of a railroad running through distant lands they had never laid eyes on. By the 1830s, railroad shares had appeared on the market, and through the nineteenth century railroad stocks sat at the center of New York trading. The market became a device that drew up, from every corner of society, the capital for the very enterprise of opening up the land.

In this age, industrialists who amassed enormous fortunes also emerged. Cornelius Vanderbilt, who expanded his business from shipping into railroads, was the representative figure; in the latter half of the nineteenth century he was called the ‘Railroad King,’ and his estate is said to have reached a scale extraordinary for its time. The way the rail network bound east and west, allowing people, goods, and information to move at high speed, became the driving force by which America climbed to become an industrial nation. The capital the market gathered drew steel arteries across the real land—it was indeed a spectacle that displayed the creative power of capitalism.

Toward a Market That Moves the State

The market that grew up alongside the railroads in time became the heart of the American economy. The place-name ‘Wall Street’ came, before anyone noticed, to transcend a single street and stand as the very byword for finance itself. A place where companies gathered capital to launch their enterprises, a place where people bought and sold their expectations of the future, and a mirror that reflected the temperature of the nation’s economy—the market swelled into something that bound all of these together.

As the market’s power grew, its influence spilled beyond the bounds of the economy. The rise and fall of share prices swayed the fates of companies, the fortunes of companies shook people’s lives and employment, and ripples reached at last into the nation’s politics and policy. The market was no longer an inner gathering of merchants. It had become an immense power that bore upon itself the prosperity and anxiety of an entire nation, and that at times began to move even the state. The small promise beneath a single buttonwood tree had, over the course of little more than a century, transformed into the very nerve center of the world economy.

What sustained this growth was not merely the fact that capital had gathered. As the market grew larger, those who wished to sell shares and those who wished to buy them came to be always present at once, and an assurance was born that share certificates could be converted into cash at any time. It was precisely this quality of being able to ‘let go at any time’ that made it possible to invest casually in distant, unfamiliar enterprises, drawing in still more capital. The market matured, too, as a mechanism for softening the risk of investment.

Yet the greater the power grows, the greater its tremors become. When expectation swells all at once, prices climb without limit; when anxiety spreads all at once, they collapse as if tumbling down a slope. That the market had gained power enough to move the state also meant that its collapse, too, could reach a scale enough to shake the state. As the twentieth century opened and America reveled in unprecedented prosperity, Wall Street quietly climbed to heights without precedent in its history. Next time, we move toward the story of the greatest collapse in history, which lay in wait at the very peak of that prosperity—the autumn of 1929, when everything came crashing down.