No one argues that Wall Street needs reforms after the financial debacle of 2008. But then it has always needed reforming, because it has been in a constant state of evolution for 218 years. And most of that reform was accomplished by Wall Street itself, not government.
In the early days of Wall Street the trading that took place there was so limited that little regulation was needed. On Mar. 16, 1830, the New York Stock and Exchange Board--as the New York Stock Exchange was then called--traded a grand total of 31 shares.
But the Civil War changed everything. As the national debt soared from $65 million to $2.7 billion, and as the economy expanded enormously to meet wartime needs, Wall Street exploded in size. By 1865 it was second only to London. But regulation was almost nonexistent. New exchanges had sprung to meet the hugely increased trading, and the curb market operated on Broad Street with no regulation whatever. Worse, New York state and city governments were utterly corrupt; an English magazine of the time reported that "in New York there is a custom among litigants as peculiar to that city, it is to be hoped, as it is supreme within it, of retaining a judge as well as a lawyer."
When Cornelius Vanderbilt tried to buy enough common stock in the Erie Railway to control the company, members of the Erie board just started printing more and more of it. "If this printing press don't break down," one of the directors said, "I'll be damned if I don't give the old hog all he wants of Erie."
The directors turned the proceeds into cash, and when Vanderbilt had his judge issue arrest warrants, they fled to New Jersey with $7 million of the Commodore's money in a carpet bag.
Vanderbilt soon compromised with the Erie board, but Wall Street brokers realized this was no way to run a capital market. When the Open Board of Brokers merged in 1869 with the New York Stock Exchange to become the overwhelmingly dominant exchange on The Street, reforms were instituted quickly. Companies traded on the exchange could not be traded elsewhere, so the exchange could keep an eye on what was going on. And companies had to maintain an open registry of their securities, so that it could be determined exactly what was outstanding, and give 30 days' notice of new issues.
As the 19th century went on, Wall Street continued its vast expansion, becoming the equal of London. But Wall Street bankers and brokers didn't like the fact that companies could keep their books as they pleased, often concealing the financial truth in the process. Increasingly banks such as J. P. Morgan and Co. and Kuhn Loeb began requiring companies that wanted their securities underwritten by them to keep their books according to what are now called generally accepted accounting principles and to have them certified by independent accountants. The NYSE soon had a similar requirement for companies listed there. Company managers, of course, didn't like the idea, but there was nothing they could do about it.
Too bad that the federal and most state governments are still free to cook their books, with disastrous consequences for the taxpayers.
The reforms of the 1930s marked the entrance of the federal government into the regulation of Wall Street, with the formation of the SEC and the passage of the Glass-Steagall Act, regulating investment banks. But even at that time there was pressure from within The Street to reform its ways, to make it less a private club and more an institution serving the public.
By 1940, with a new constitution for the NYSE, that was what happened. Even the elimination of fixed commissions on "May Day," May 1, 1975, was pushed by the pension and mutual funds that had come to dominate The Street in the previous two decades.
Now new reforms are coming. One hopes that The Street will have a voice in determining their shape and extent, as it has a pretty good track record of reforming itself in positive way.
But
John Steele Gordon is the author of Hamilton's Blessing: the Extraordinary History of Our National Debt, just out from Walker & Co., in a revised and updated edition.
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