The Government And Wall Street Go Way Back
By Melvin J. Howard
No matter what the sentiment is right now about Wall Street the fact is the Government needs Wall Street and Wall Street needs the Government and that is not going to change anytime soon. It all started back in the 1700’s when most of America's riches were based upon land the more you had the richer you were. The new young world provided more than just space for the land-starved Europeans. The millions of undeveloped acres were too hard to resist. Success was limited only by lack of imagination. Trading with the Europeans and with the Indians, manufacturing basic staples, and ship transportation all had been pursued successfully by some of the country's oldest, and newest, entrepreneurs. The businessman providing these services was adding value to other goods and services for a society that was hardly self-sufficient at the time. Making money was smiled upon almost expected as long as a few basic rules were followed. Others had to benefit as well from entrepreneurship. Borrowing money to become successful in business was becoming popular because it was recognized that capitalism could be practiced in some cases.
Between independence and the Civil War, land played the pivotal role in American investments and dreams. The vast areas of the country and its seemingly never-ending territories provided untold opportunities for Americans and Europeans alike. They represented everything the Old World could no longer offer—opportunity, space to grow, and investment possibilities. The idea certainly never lost its allure. When early entrepreneurs borrowed large sums of money, it was often to purchase land in the hope of selling it to someone else at a profit. This American ideology was never forgotten. Its role as the pivotal part of the American Dream is still used today. Although in this current market some would disagree.
At the time of American independence, land was viewed less for home-ownership than for productive purposes. England had already been stripped bare of many natural resources, and new lands were sought to provide a new supply. Much land was also needed to provide the new crop craved by both Europeans and Americans—tobacco. The desire to own property had also been deeply ingrained in the European and English people. Africans who were slaves at the time also wanted their share of land but it was against the law of that time. Hence the saying 40 acres and a mule that was promised after slavery was outlawed. Owning land has been deeply embedded in American culture since the start of the revolution.
But the market place was hardly efficient as those of Britain and Holland. Basic institutions were still lacking. The new U.S. Treasury Department was not instituted until six months after George Washington was sworn in as president in 1789. Another institution the new country lacked was an organized stock exchange a manufacturing country would not develop quickly or well. Exchanges were needed so that investors could become familiar with companies and their products. Only when the merchants began turning their attention to providing money for new ventures did the idea of trading shares and bonds become more attractive. A market for these sorts of intangible assets had already existed in Europe for about a hundred years, but the idea was slow in crossing the Atlantic.
The European stock exchanges, or bourses, as they were called, were established in the seventeenth century as places where governments could sell their own loans (bonds) and the large mercantile trading companies could raise fresh cash for their overseas adventures. The Dutch developed their bourses first, as early as 1611, with the English following about seventy five years later. Besides trading commodities vital to the developing mercantilist trade, both bourses began to actively trade new concepts in financing shares or loans and bonds Governments and the early trading companies began to look upon private investors as sources of capital. Borrowing from investors were safer, for more than one British government had run into trouble by overtaxing its citizens. Investors warmed to the idea of share ownership because it limited their risk in an enterprise to the amount actually invested in it. Although the partnership form of control was far from outdated, the new corporate concept began to take hold.
After the Revolutionary War, the new American federal government immediately found itself in delicate financial straits, complicating matter-considerably. The first Congress met in New York City in 1789. The new government assumed all the war debts of the former colonies and the Continental Congress. Unfortunately, it had little actual revenue if the new Republic did not honour its existing debt progress would be difficult for new creditors would not be found easily. As a result, the U.S. government borrowed $80 million in New York by issuing federal government bonds. Necessity became the mother of invention and the American capital markets, however humble, were born. The major competition for money came from basic industries and financial institutions that were quickly establishing themselves in the new country.
Most of these institutions were American versions of British trading companies and financial institutions well known in the colonies before the war. Merchants, traders, and investors trusted these companies more than they did governments. As a result, the rate of interest paid to the new government had to be fairly high to compensate, but buyers’ did not provide strong demand for the new bonds. After having shaken off the chains of British colonial domination, the entrepreneurs and merchant in New York, Boston, and Philadelphia were not particularly keen to loan money to another government, especially one as untested as the new federal government, which did not yet even have a permanent home. As a result, many of the new government bond issues were only partly sold. The three major cities that were home of American capitalism in its infancy back then.
Philadelphia was home of the first actual stock exchange, Boston continued as a shipping center, and New York was the rapidly emerging center for financial services such as insurance and banking. Although the government bonds were sold in all three places and other major cities such as Baltimore and Charleston as well, New York developed the first active market for trading bonds and the shares of emerging companies. Local merchants and traders would gather at various locations in lower Manhattan, around Wall Street, along a barricade built by Pete Stuyvesant in 1653 to protect the early Dutch settlers from the local Indians. There they congregated to buy and sell shares and loans (bonds). From there securities business quickly grew, the traders divided their-selves into two classes—auctioneers and dealers. Auctioneers set the prices, while dealers traded among themselves and with the auctioneers.
Most of these institutions were American versions of British trading companies and financial institutions well known in the colonies before the war. Merchants, traders, and investors trusted these companies more than they did governments. As a result, the rate of interest paid to the new government had to be fairly high to compensate, but buyers’ did not provide strong demand for the new bonds. After having shaken off the chains of British colonial domination, the entrepreneurs and merchant in New York, Boston, and Philadelphia were not particularly keen to loan money to another government, especially one as untested as the new federal government, which did not yet even have a permanent home. As a result, many of the new government bond issues were only partly sold. The three major cities that were home of American capitalism in its infancy back then.
Philadelphia was home of the first actual stock exchange, Boston continued as a shipping center, and New York was the rapidly emerging center for financial services such as insurance and banking. Although the government bonds were sold in all three places and other major cities such as Baltimore and Charleston as well, New York developed the first active market for trading bonds and the shares of emerging companies. Local merchants and traders would gather at various locations in lower Manhattan, around Wall Street, along a barricade built by Pete Stuyvesant in 1653 to protect the early Dutch settlers from the local Indians. There they congregated to buy and sell shares and loans (bonds). From there securities business quickly grew, the traders divided their-selves into two classes—auctioneers and dealers. Auctioneers set the prices, while dealers traded among themselves and with the auctioneers.
This early form of trading set a precedent that would become embedded in American market practice for the next two hundred years. The only problem was that the auctioneers were in the habit of rigging the price of the securities.The new market conducted at the side of the street and in coffeehouses were crude approximation of the European stock exchanges that had existed for some time. The London and Antwerp stock exchanges were quite advanced in raising capital and trading shares and bonds for governments and the early mercantilist trading companies.
The exchanges developed primarily because both countries were the birthplaces of modern capitalism. Equally, the British and the Dutch exported much capital abroad, in hope of reaping profits from overseas this was possible and necessary because both had excess domestic capacity and money and were anxious to find new areas of profit. And many years before the American Revolution, both had already had their share of financial scandal, the South Sea bubble and tulip speculation being two of the more noteworthy.
The exchanges developed primarily because both countries were the birthplaces of modern capitalism. Equally, the British and the Dutch exported much capital abroad, in hope of reaping profits from overseas this was possible and necessary because both had excess domestic capacity and money and were anxious to find new areas of profit. And many years before the American Revolution, both had already had their share of financial scandal, the South Sea bubble and tulip speculation being two of the more noteworthy.
These early scandals had proved that sharp dealings and rampant speculation could seriously diminish the enthusiasm of private investors, who were vital for the development of industrial capitalism antics of an early speculator made raising money difficult in the middle and late 1790s. In essence the American financial system adopted from the Dutch and British system an inherent flaw. That is ultimately bubbles will form to cause havoc in the economy. Boom and bust cycles will always exists unless a new formula is found. In March 1792 a local New York merchant speculator named William Duer became overextended in his curbside dealings, and many of his speculative positions collapsed having financed them with borrowed money, he was quickly prosecuted and sent to debtors' prison.
A member of a prominent English family with extensive holdings in the West Indies. Duer permanently settled in his adopted country in 1773, becoming sympathetic with the colonists' grievence against Britain. Well acquainted with New York society, he quickly began to hold positions of importance. He was a New York judge, and a signer of the Articles of Confederation. He was also secretary to the Board of the Treasury, a position that made him privy to the inner workings of American finance in the late 1780s. Having developed a keen knowledge of international finance, he was intent upon opening a New York bank capable of rivaling the great British and Dutch merchant banking houses of the time.
THE EARLY BANKERS
The early investment bankers came from humble origins. More than one had begun his career as a merchant, selling hardware and household goods from the back of a horse-drawn carriage. Usually these merchants would borrow money to buy their inventories and would repay the loan when they returned from their travels (the origin of the term •working capital, which has endured to the present). Many merchants quickly realized that the individuals or small banks loaning them money worked less hard than they did selling their wares on the road. That prompted many of them to try their hand at the banking business, and many small merchant bankers set up shop, especially during the travails of the Second Bank of the United States.
The banking profession that many entered was still a far cry from the investment banking business as it is understood today. Prior to the Civil War, anyone who loaned money to a company by buying its bonds was considered a financier to the company. The same was true of stockholders. Many of the new bankers simply bought bonds from a company when they were first issued and either held them as investments or arranged to sell them to other financial institutions for a small fee. This was a crude form of underwriting but not the same type that would emerge later in the century, when syndicates of investment banks would pool funds and buy entire issue from companies with the intention of reselling to other investors. New securities before the Civil War had dozens of initial investors ranging from the larger New York and Philadelphia banks down to the small two-man operations that remained in business for only a short time.
In the 1830s, many new investment houses emerged to help investors trade shares and foreign exchange and raise capital for new companies and entrepreneurs. Nathaniel Prime, one of the early members of the stock exchange as well as John Eliot Thayer established a similar operation in Boston, which later would become Kidder, Peabody and Company. While all performed essentially the same operations, the merchants turned bankers were very similar to their British merchant banking counterparts since they became bankers in order to serve themselves and other merchants. The brokers and other finance people who turned to banking forged strong connections between what is known today as commercial banking (taking deposits and making loans) and investment banking (underwriting securities), especially by loaning depositors' funds to the early securities markets.
Many merchant bankers appeared in New York, migrating from other areas where they had initially found some success. Merchant bankers had a distinct edge over commercial bankers that would play an important role in American economic history for the next hundred years. Private merchant bankers, using their own capital as a base for their operations, were not required to have a state charter and as a result did not have to make their financial positions public. Successful private bankers would be able to develop considerable financial power without outside scrutiny since they were not accountable to anyone other than their clients.
In the early days of American finance this helped them keep above the states' rights arguments that surrounded much of the banking industry and also kept them out of the money printing controversy since private bankers did not issue their own notes.The nature of private banking attracted foreign firms eager to do business legendary N. M. Rothschild (originally a German firm) of London established an American connection through an agent, August Belmont, who in turn established August Belmont and Company in order to represent the Rothschilds in North America. The Rothschilds had already established a legendary reputation for shrewdness. Most of the financial world already knew of their acumen in using carrier pigeons to inform them of Wellington. The Rothschilds legendary banking name, rival that of the Medici in the annals of European finance.
In the early days of American finance this helped them keep above the states' rights arguments that surrounded much of the banking industry and also kept them out of the money printing controversy since private bankers did not issue their own notes.The nature of private banking attracted foreign firms eager to do business legendary N. M. Rothschild (originally a German firm) of London established an American connection through an agent, August Belmont, who in turn established August Belmont and Company in order to represent the Rothschilds in North America. The Rothschilds had already established a legendary reputation for shrewdness. Most of the financial world already knew of their acumen in using carrier pigeons to inform them of Wellington. The Rothschilds legendary banking name, rival that of the Medici in the annals of European finance.
ENTER THE HOUSE OF MORGAN
One of the major financiers at the time was Winslow, Lanier and Company, founded in New York City in 1849 by James F. Lanier. It acted as paying agent and transfer agent for many companies, especially the railroad merchant bankers simply took positions in securities and acted as passive investors or short-term traders. One innovation that the company introduced to railway bonds was selling by sealed bids a technique that was used by the treasury for the previous twenty years, partly in response to criticisms about being too close to the large merchants who had helped sell the War of 1812 issues. But perhaps one of the most important firms of all to apper before the civil war was that of George Peabody and Company founded by an American living in London in 1851.
The firm was better known for Peabody's partner, Junius Spencer Morgan, who was recruited by Peabody from Boston. Junius's son, John Pierpont Morgan, or J. P.. who would become probably the best-known banker of the early twentieth century, was just a schoolboy when his father worked for the London firm. Junius changed the name of the firm to J. S. Morgan and Company when Peabody retired, marking the beginning of the extraordinary influence that Morgan, his son, and grandson would hold over American finance for the next ninety years. The Morgan firm, later to become a full-fledged domestic American bank, would continue to specialize in funnelling foreign capital to the United States for well over a century. Although American in origin, the Peabody and (later) Morgan firms were still considered foreign because of their locations but were never the less a considerable amount of foreign capital from Europe to the United States. By the 1840s, foreign capital was heavily invested in American Treasury bonds, municipal bonds, and the stock and bonds of the rapidly expanding railways. But not all of the newly established houses were American. Many were established by German Jewish merchants and quickly became embedded as major forces in the merchant banking business.
The firm was better known for Peabody's partner, Junius Spencer Morgan, who was recruited by Peabody from Boston. Junius's son, John Pierpont Morgan, or J. P.. who would become probably the best-known banker of the early twentieth century, was just a schoolboy when his father worked for the London firm. Junius changed the name of the firm to J. S. Morgan and Company when Peabody retired, marking the beginning of the extraordinary influence that Morgan, his son, and grandson would hold over American finance for the next ninety years. The Morgan firm, later to become a full-fledged domestic American bank, would continue to specialize in funnelling foreign capital to the United States for well over a century. Although American in origin, the Peabody and (later) Morgan firms were still considered foreign because of their locations but were never the less a considerable amount of foreign capital from Europe to the United States. By the 1840s, foreign capital was heavily invested in American Treasury bonds, municipal bonds, and the stock and bonds of the rapidly expanding railways. But not all of the newly established houses were American. Many were established by German Jewish merchants and quickly became embedded as major forces in the merchant banking business.
The Lazard brothers of New Orleans formed Lazard Freres in 1832 and quickly used their European connections to establish a base outside the United States as well. Marcus Goldman, another Bavarian Jew, established Goldman Sachs and Company in 1869. One of the firm's specialties was trading in commercial paper, a market the United States sorely lacked in the period prior to the Civil War. The absence of such a market had contributed to the many business downturns and panics that occurred before the war. Goldman came to dominate the commercial paper market.
The Jewish firms specialized in the usual merchant banking business, and many opened branch operations in Germany and other European investors. By doing so, they changed the complexion of American creditors, who for many years had been predominantly British. They keep to themselves socially. Usually, the top job at a firm was passed on only to a relative or to a son-in-law, ensuring a line of succession when the patriarch died or retired. But despite their separation from the purely "Yankee" houses in the securities business, these firms became central members of New York society by virtue of their influence and far-reaching business connections.
The Jewish banking houses shared an essential element with the /Yankee houses that proved indispensable on Wall Street. All were enthusiastically bullish on the economic prospects for the United States and sold that bullishness to foreign and domestic investors alike. Long before securities analysis became popular, they touted the relative safety of the United States from invasion and stressed the vast resources of the country, many of which were still being uncovered, as their own success demonstrated. So here we are everybody pointing fingers when as history has told us that Wall Street always has been firmly entrenched in the political fabric of America from the very beginning. J.P. Morgan back then now Goldman Sachs. So why are people suddenly noticing Wall Street now. Because some people on Wall Street really thought they were masters of the universes only to find out that the universe is to big for any one person or company to master. But lets face it nobody ever paid attention in history class and history is bound to repeat itself. Only the next time might be the really last time because you can't run a country like an investment bank.
