Wall Street

Viewed suspiciously by people as far apart politically as the Rev. Jesse Jackson and the Rev. Pat Robertson, Wall Street is seen as the fulcrum of money manipulation and shenanigans involving the U.S. economy.

The “insider trading” scandals of the 1980s added to the perception that Wall Street was soaked in corruption, full of phoney deals, and a front for nefarious interests of all types.

The New York Stock Exchange (NYSE), the largest securities exchange in the United States, began in 1792 when twenty-four New York merchants and brokers agreed to charge standard commissions on their sales. Formally organized in 1817 as the New York Stock Exchange Board, the NYSE adopted rules to govern the sales of securities.

Members paid an admission fee of $25 and had to have a year’s experience in the brokerage business before the entire membership could vote to allow them to join. In its early years, the NYSE traded thirty different securities, including federal, state, and municipal bonds, but soon railroads and other private corporations traded shares on the Exchange.

Financing the Civil War led to immense growth in the NYSE, and the sales of war bonds led to charges of corruption and “speculation.” (Defining speculation is difficult, in that it is trading in a security for a “short-term” gain. What constitutes “short term” to one person is a lifetime to another.)

The collapse of Jay Cooke’s investment banking house triggered the panic of 1873, raising suspicions about the “New York money power,” “Jewish interests” (linked to the Rothschilds), and Wall Street. By the end of the 1800s, some 1,300 securities were traded on “the Street,” and in 1901 daily volume reached 3 million shares.

In reality, the sheer volume of Wall Street transactions made it nearly impossible for any consortium—let alone individual—to “control” even a single major stock, let alone the “market.”

New York Stock Exchange in Wallstreet
New York Stock Exchange in Wallstreet

Quite the contrary, the NYSE has been buffeted by external events: in 1914, along with all exchanges in Europe, Wall Street closed for more than four months after World War I broke out, and in 2001 the terrorist attacks on the World Trade Center shut down the NYSE for three business days.

The strongest criticisms of Wall Street came over its purported role in causing the Great Depression. During the 1920s, in what was called the “Great Bull Market,” stock prices skyrocketed, some rising several hundred percent in a few months.

Americans of almost every social strata participated in the market, with one survey of a new bond issue showing teachers, janitors, maids, and cab drivers among the most frequently represented occupational groups.

Charles E. Merrill pioneered securities sales to the middle class. But concerns were raised over the perception that most people invested through “margin loans,” which involved using the value of the stock that was to be purchased as collateral for a broker to advance the loan.

A second major concern focused on the role of “securities affiliates,” which were brokerage houses associated with major banks. Critics charged that banks used bank deposits to fuel lending by the securities affiliates, feeding speculation even more.

When the market crashed on 29 October 1929, the Dow Jones Industrial Average witnessed a stunning decline as 16 million shares changed hands. The Crash brought investigations by the Senate Banking and Currency Committee led by counsel Ferdinand Pecora (“the hellhound of Wall Street”). Pecora hauled America’s top bankers before the committee, especially hammering Charles Mitchell of National City Bank.

Convinced that the banks and brokers had created the boom with pure speculation, Congress passed the Securities and Exchange Act of 1934, set up the Securities and Exchange Commission, and then, in 1935, passed the Glass-Steagall Banking Act that separated investment from commercial banking.

Subsequent research by scholars has shown all these premises to be false: virtually no academic has been able to verify that any genuine speculation occurred—and certainly no speculation of proportions that would generate the “Great Bull Market”—and rather than harming banks, having a securities affiliate tended to make a bank more stable and solvent than banks that lacked those affiliates.

No one has yet been able to explain the specific cause of the Great Crash. Contrary to some Keynesian economists, there is little evidence to suggest that money was funneled into speculation or the market. One view that remains intriguing is that the movement through Congress of the Hawley-Smoot Tariff, which dramatically increased tariff rates, triggered a sell-off based on future expected price hikes (and sales slumps).

It is also interesting to note that if the Crash was somehow manipulated to increase profits of the “moneyed interests,” the wealthiest industrialists on Wall Street poured billions of dollars into securities in an attempt to keep the market afloat. Many of them lost their entire fortunes. Only a few, such as Joseph P. Kennedy, a liquor-runner and father of the future president, who entered the market after the Crash, made money.

Among the conspiracy theorists, Wall Street has always been a villain responsible for starting wars and “electing” totalitarian leaders. Some groups see a “Bolshevik-Wall Street” connection, while those subscribing to the “Reformed Christianity” doctrines of Gary North and R. J. Rushdoony claim that Wall Street aided and abetted the rise of Adolph Hitler.

After World War II, Americans slowly returned to the markets, especially investing indirectly through large pension funds. The Dow Jones rose steadily after World War II, but truly exploded after the tax cuts under the administration of President Ronald Reagan. With both income tax cuts and capital gains tax cuts enacted, Wall Street witnessed phenomenal and steady increases that continued until the World Trade Center attack in 2001.

During that time, a new group of bond traders appeared on the scene using a newly created security, the “junk bond.” In fact, junk bonds were far from junk: they financed MCI Telephone, Disney, McCaw Cellular, and dozens of other business start-ups or expansions.

They were called junk because they had not yet been rated by the NYSE—but many securities with an AAA rating represented nearly bankrupt companies, while junk bonds financed some of the fastest growing sectors of the economy, especially the new high-tech ventures. Both the “junk king,” Michael Milken of Drexel Burnham Lambert, and Ivan Boesky became wealthy through their transactions with junk bonds.

Boesky, who was the character upon whom Michael Douglas’s “Gordon Gekko” was based in the movie Wall Street, was arrested on charges of insider trading with some of these securities, and in turn provided information that implicated Milken. Both men served time in jail for fraud.

In the 1990s, many viewed the “dot.com” boom as a speculative manipulation similar to that of the 1920s. Nevertheless, the Dow Jones continued to surge, topping the 11,000 mark, before the events of September 11 brought a temporary sell-off. By that time, however, it was unfathomable for any individual to control enough securities to even move a single company’s stock a point or two, let alone to affect the entire market.