Wall Street | Charles R. Geisst

Summary of: Wall Street: A History: From Its Beginnings to the Fall of Enron
By: Charles R. Geisst

Introduction

Welcome to the tale of Wall Street and its tumultuous history, from its early haphazard beginnings to the onset of the twenty-first century. Charles R. Geisst’s ‘Wall Street: A History’ takes you on a compelling journey through the evolution of financial markets in America, marked by significant scandals, panics, and the rise of key players. Delve into the world of stocks, bonds, investments, and exchanges, alongside the fraught interplay between business and government, as the book uncovers how greed and ambition shaped the foundations of the financial sector. As you read on, grasp the various turning points, such as the Buttonwood Agreement, the rise of robber barons, and the era of increased regulation, and how they contributed to the growth and transformation of the American economy.

The Creation and Consolidation of the US Stock Market

In the early days of the American colonies, there was no consistent currency or stock exchange. However, recognizing the need for a formal exchange, dealers and auctioneers signed the Buttonwood agreement in May 1792 which established a stock exchange for buying and selling shares and loans. The new American nation faced a financial challenge in the form of war debt, but had no revenues to use to pay its obligations. When the U.S. government issued its first bonds, it faced competition from financial trading firms which drove up interest rates. The Philadelphia, Boston, and New York trading centers developed as the most active markets, with New York becoming the largest. However, the market was unregulated, corrupt, and risky. A financial panic caused by the Duer scandal catalyzed the New York Stock and Exchange Board, established in 1817. Financing advances in transportation became one of the major functions of the stock exchanges, along with being an arena for fraud and corruption.

The Rise and Fall of America’s Central Banks

This summary explores the establishment, controversies and collapse of two central banks in the United States, and the absence of an alternative institution to ensure financial stability.

In 1791, the Bank of the United States was created to serve as the country’s central bank. Although its charter lapsed in 1811, it was later revived in 1816 with the establishment of the Second Bank of the United States, which soon became politically controversial. The bank’s president, Nicholas Biddle, opposed Andrew Jackson’s presidential bid, which led to its collapse when Jackson withdrew all federal deposits from the bank in 1833.

Despite the bank’s efforts to provide financial stability, its opponents hailed its demise as a victory for the common people and states’ rights advocates. Unfortunately, the collapse of the bank left the country without an alternative institution to ensure financial stability.

The absence of such an institution enabled short-sellers, like Jacob Little, to make fortunes at the expense of the market. Little prospered by selling short until the panic of 1837 when the market turned against him, and he lost a million dollars before he could cover his positions.

Although unregulated markets emerged, modern structures such as bond underwriting, commercial banking, and municipal finance all date from this time. As such, investment houses emerged, and New York became a favorite location for merchant bankers.

The absence of a central bank in the United States left the country vulnerable to financial panics and crises until the establishment of the Federal Reserve System in 1913. Overall, the rise and fall of America’s central banks offer valuable lessons in financial regulation and stability.

Revolutionary Capital Mobilization

Jay Cooke’s innovative strategy of capital mobilization using small investors to support the Union during the Civil War proved to be revolutionary. With more than 2,000 agents all over northern cities and states, Cooke marketed war bonds as a patriotic investment that promised lower taxes and financial returns. He successfully targeted the unsophisticated and the sophisticated investors alike. However, the accusations that Cooke made a profit from the Union’s efforts were unfounded, as he received only meager commissions. Cooke’s businesses encountered financial difficulties following the war, leading to his commercial empire’s collapse in 1873.

America’s Titans

The rise of America’s industry titans from Daniel Drew to John D. Rockefeller and the impact of trusts and corporations.

The late 19th century saw the boom of the industrial age in America, giving rise to what we now know as the “robber barons” – a colloquial term for the great industrialists who emerged during the time. Daniel Drew, a speculator in railroad stocks and a self-proclaimed illiterate, was among these legendary financial titans. He made his fortune using his extraordinary instinct for finance, often employing questionable tactics such as selling “watered” stocks and driving cattle long distances without allowing them to eat or drink, then letting them fill up in a convenient waterhole before selling them by weight.

Another force that emerged during this period was the trust – a business arrangement in which companies pooled their interests by exchanging shares for trust certificates. This allowed them to grow and expand without tapping into new markets or engaging with bankers. John D. Rockefeller, the notorious trust manipulator, preferred to underwrite Standard Oil’s expansion by paying for acquisitions in stock or cash. However, the Sherman Anti-Trust Act of 1890, although originally toothless, eventually led the financial world to abandon trusts in favor of modern corporations.

Consolidation was the underlying economic trend of this period, and the great business figures of this time consolidated their industries, relying on the markets and developing banking systems to secure capital. Standard Oil started as a trust before becoming a publicly traded corporation, as did AT&T, GE, and American Tobacco Company.

Fast forward to the late 1980s, and merger mania was in full swing, with the basic component of a bullish market being the consolidation of capital-intensive industries. Reagan’s philosophies gave the market heart, but economists and markets alike were confused as several were espoused at the same time. The impact of trusts and consolidation is still relevant today and has had a lasting impact on the American economy.

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