Market Related Articles » Wall Street - A History Lesson
Location
Wall Street is a street in lower Manhattan, New York City, New York, United States. It runs east from Broadway to South Street on the East River, through the historical center of the Financial District. Wall Street was the first permanent home of the New York Stock Exchange; over time Wall Street became the name of the surrounding geographic neighborhood.
Wall Street is known as the "influential financial interests" area of the American financial industry. Several major U.S. stock and other exchanges remain headquartered on Wall Street and in the Financial District, including the NYSE, NASDAQ, AMEX, NYMEX, and NYBOT.
History
The name of the street derives from the fact that during the 17th century, Wall Street formed the northern boundary of the New Amsterdam settlement. In the 1640's basic picket and plank fences denoted plots and residences in the colony. Later, on behalf of the Dutch West India Company, Peter Stuyvesant, in part using African slaves, led the Dutch in the construction of a stronger stockade. A strengthened 12-foot (4 m) wall of timber and earth was created by 1653 fortified by palisades. The wall was created, and strengthened over time, as a defense against attack from various Native American tribes, New England colonists, and the British.
In 1685 surveyors laid out Wall Street along the lines of the original stockade. The wall was dismantled by the British in
1699. And while the original name referred to the Walloons, the French speaking Belgians that helped populate this settlement in the beginning, the name was now easily taken to refer to the wall that once was here.
In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade informally. In 1792, the traders formalized their association with the Buttonwood Agreement. This was the origin of the New York Stock Exchange, also known as the NYSE. This agreement was signed by 24 stock brokers outside of 68 Wall Street.
In 1789, Federal Hall and Wall Street was the scene of the United States' first presidential inauguration. George Washington took the oath of office on the balcony of Federal Hall overlooking Wall Street on April 30, 1789. This was also the location of the passing of the Bill Of Rights.
In 1889, the original stock report, Customers' Afternoon Letter, became the The Wall Street Journal, named in reference to the actual street, it is now an influential international daily business newspaper published in New York City. For many years, it had the widest circulation of any newspaper in the United States, although it is currently second to USA Today. It has been owned by Rupert Murdoch's News Corp. since 2007.
Troubled Times
The Manhattan Financial District is one of the largest business districts in the United States, and second in New York City only to Midtown. In the late 19th and early 20th centuries, the corporate culture of New York was a primary center for the construction of skyscrapers (rivaled only by Chicago). The Financial District, even today, actually makes up a distinct skyline of its own, separate from but not soaring to quite the same heights as its midtown counterpart a few miles to the
north.
Federal Hall is a National Memorial, located at 26 Wall Street. Built in 1914, it was known as the "House of Morgan". For decades the bank's headquarters was the most important address in American finance.
At noon, on September 16, 1920, a bomb exploded in front of the the "House of Morgan". 38 people were killed and some 300 were injured from the blast. Shortly before the bomb went off a warning note was placed in a mailbox at the corner of Cedar Street and Broadway. While theories abound about who was behind the Wall Street bombing and why they did it, after twenty years investigating the matter, the FBI rendered the file inactive in 1940 without ever finding the perpetrators.
Crash of 1929
The Wall Street Crash of 1929 was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and longevity of its fallout.
Three phrases - Black Thursday, Black Monday, and Black Tuesday - are used to describe this collapse of stock values. All three are appropriate, for the crash was not a one-day affair. The initial crash occurred on Black Thursday (October 24, 1929), but it was the catastrophic downturn of Black Monday and Tuesday (October 28 and October 29, 1929) that precipitated widespread panic and the onset of unprecedented and long-lasting consequences for the United States. The
collapse continued for a month.
In this picture to the right, a crowd gathers at the intersection of Wall and Broad streets after the 1929 crash. The New York Stock Exchange (18 Broad Street) is on the right. The majority of people are congregating in Wall Street on the left between the "House of Morgan" (23 Wall Street) and Federal Hall (26 Wall Street) to the left. During this era, new development of the Financial District had stagnated.
At the time of the crash, New York City had grown to be a major metropolis, and its Wall Street district was one of the world's leading financial centers. The New York Stock Exchange (NYSE) was the largest stock market in the world at the time.
The Roaring Twenties, which was a precursor to the Crash, was a time of prosperity and excess in the city, and despite warnings against speculation, many believed that the market could sustain high price levels. Shortly before the crash, Irving Fisher famously proclaimed, "Stock prices have reached what looks like a permanently high plateau."
The euphoria and financial gains of the great bull market were shattered on Black Thursday, when share prices on the NYSE collapsed. Stock prices fell on that day and they continued to fall, at an unprecedented rate, for a full month.
In the days leading up to Black Tuesday, the market was severely unstable. Periods of selling and high volumes of trading were interspersed with brief periods of rising prices and recovery. Economist and author Jude Wanniski later correlated these swings with the prospects for passage of the Smoot-Hawley Tariff Act, which was then being debated in Congress.
After the crash, the Dow Jones Industrial Average (DJIA) recovered early in 1930, only to reverse again, reaching a low point of the great bear market in 1932. The Dow did not return to pre-1929 levels until late 1954, and was lower at its July 8, 1932 level than it had been since the 1800's.
Timeline of the Crash
After a five-year run when the world saw the Dow Jones Industrial Average (DJIA) increase in value five-fold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down. Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterward.
The decline then accelerated into the so-called "Black Thursday", October 24, 1929. A record number of 12.9 million shares were traded on that day. At 1 p.m. on Friday, October 25, several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. The meeting included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin, head of the Chase National Bank; and Charles E. Mitchell, president of the National City Bank. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.
With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.
Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, the first "Black Monday", more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%. The next day, "Black Tuesday", October 29, 1929, about 16 million shares were traded. This volume was set a record that was not broken for nearly 40 years, in 1968.
William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12%. The ticker did not stop running until about 7:45 that evening. The market had lost $14 billion in value on the 29th, bringing the loss for the week to $30 billion. This was ten times more than the annual budget of the federal government then, and far more than the U.S. had spent in all of World War I.
An interim bottom occurred on November 13, with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak (known as a dead cat bounce) at 294.0 in April 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.
Economic Fundamentals
The crash followed a speculative boom that had taken hold in the late 1920's, which had led hundreds of thousands of Americans to invest heavily in the stock market, including a significant number even borrowing money to buy more stock. By August 1929, brokers were routinely lending small investors more than 2/3 of the face value of the stocks they were buying. Over $8.5 billion was out on loan, more than the entire amount of currency circulating in the U.S.
The rising share prices encouraged more people to invest. Speculation thus fueled further rises and created an economic bubble. The average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929, clearly above historical norms. Most economists view this event as the most dramatic in modern economic history.
On October 24, 1929 (with the Dow just past its September 3 peak of 381.17), the market finally turned down, and panic selling started. 12,894,650 shares were traded in a single day as people desperately tried to mitigate the situation. This mass sale is often considered a major contributing factor to the Great Depression.
Some hold that political over-reactions to the crash, such as the passage of the Smoot-Hawley Tariff Act through the U.S. Congress, caused more harm than the crash itself. According to "Thomas K. McCraw, a professor at the Harvard Business School," the Smoot-Hawley Tariff Act ... exacerbated the problem by preventing Europeans from selling enough goods in the United States to earn enough dollars to pay off their debts from World War I."
Official Investigation
In 1931, the Pecora Commission was established by the U.S. Senate to study the causes of the crash. The U.S. Congress passed the Glass-Steagall Act in 1933, which mandated a separation between commercial banks, which take deposits and extend loans, and investment banks, which underwrite, issue, and distribute stocks, bonds, and other securities.
After the experience of the 1929 crash, stock markets around the world instituted measures to temporarily suspend trading in the event of rapid declines, claiming that they would prevent such panic sales.
The one-day crash of Black Monday, October 19, 1987, however, was even more severe than the crash of 1929, when the Dow Jones Industrial Average fell a full 22.6%. The markets quickly recovered, posting the largest one-day increase since 1933 only two days later. This crash was blamed on the uncontrolled use of computer black-box trading that was left unchecked.
Financial Impact
The 1929 crash brought the Roaring Twenties shuddering to a halt. As "tentatively expressed" by "economic historian Charles Kindleberger", in 1929 there was no "...lender of last resort effectively present", which, if it had existed and were "properly exercised", would have been "key in shortening the business slowdown(s) that normally follows financial crises."
The crash marked the beginning of widespread and long-lasting consequences for the United States. The main question is: Did the "'29 Crash spark The Depression", or did it merely coincide with the bursting of a credit-inspired economic bubble? The decline in stock prices caused bankruptcies and severe macroeconomic difficulties including business closures, firing of workers and other economic repression measures.
The resultant rise of mass unemployment and the depression is seen as a direct result of the crash, though it is by no means the sole event that contributed to the depression; it is usually seen as having the greatest impact on the events that followed. Therefore the Wall Street Crash is widely regarded as signaling the downward economic slide that initiated the Great Depression.
True or not, the consequences were dire for almost everybody. Most academic experts agree on one aspect of the crash: "It wiped out billions of dollars of wealth in one day, and this immediately depressed consumer buying."
The failure set off a worldwide run on U.S. gold deposits (i.e., the dollar), and forced the Federal Reserve to raise interest rates into the slump. Some 4,000 lenders were ultimately driven out of business.
Also, the uptick rule, which, allowed short selling only when the last tick in a stock’s price was positive, was implemented after the 1929 market crash to prevent short sellers from driving the price of a stock down in a bear run."
Many academics see the Wall Street Crash of 1929 as part of a historical process that was a part of the new theories of boom and bust. According to economists such as Joseph Schumpeter and Nikolai Kondratieff the crash was merely a historical event in the continuing process known as economic cycles. The impact of the crash was merely to increase the speed at which the cycle proceeded to its next level.
Milton Friedman's monumental A Monetary History of the United States, co-written with Anna Schwartz, makes the now standard interpretation of what made the "great contraction" so severe. It was not the downturn in the business cycle, trade protectionism or the 1929 stock market crash that plunged the country into deep depression. It was the collapse of the banking system during three waves of panics over the 1930-33 period."
World Trade Center
The construction of the World Trade Center was one of the few major projects undertaken during the last three quarters of the 20th century and, financially, it was not originally as successful as planned. Some point to the fact that it was actually a government-funded project, constructed by the Port Authority of New York and New Jersey with the intention of spurring economic development in downtown. All the tools necessary to international trade were to be housed in the complex. However, at the beginning much of the space remained vacant.
Nonetheless, some large and powerful firms did purchase space in the World Trade Center. Further, it attracted other powerful businesses to the immediate neighborhood. In some ways, it could be argued that the World Trade Center changed the nexus of the Financial District from Wall Street to the Trade Center complex.
When the World Trade Center was destroyed during the September 11, 2001 attacks, it left somewhat of an architectural void as new developments since the 1970s had played off the complex aesthetically. The attacks, however, contributed to the loss of business on Wall Street, due to temporary-to-permanent relocation to New Jersey and further decentralization with establishments transferred to cities like Chicago and Boston.
Today, the terrible loss of the World Trade Center buildings has actually spurred development in the Financial District on a scale that hadn't been seen in decades. This is in part due to tax incentives provided by the federal, state and local governments to encourage development.
A new World Trade Center complex, centered on Daniel Liebeskind's Memory Foundations plan, is in the early stages of development (at this writing) and one building has already been replaced. The centerpiece to this plan is the 1,776-foot (541 m) tall Freedom Tower. New residential buildings are already sprouting up, and buildings that were previously office space are being converted to residential units, also benefiting from the tax incentives. Better access to the Financial District is planned in the form of a new commuter rail station and a new downtown transportation center centered on Fulton Street.
Since the founding of the Federal Reserve banking system, the Federal Reserve Bank of New York in the Financial District has been the point where monetary policy in the United States is implemented (although it is decided in Washington, D.C. by the Federal Reserve Bank's Board of Governors). As such, New York State is today unique in that it is the only state that constitutes its own district of the Federal Reserve Banking system.