Editor’s note: This article is the second in a three-part series.
In the previous installment we covered highlights of the history of money in England during the 16th and 17th centuries. Today we talk about the monetary system in the United States and the birth of the New York Stock Exchange.
The two main events that contributed to the birth of the NYSE were the standardization of gold coins (the gold standard) and goldsmiths and merchants becoming the first private depositors (local banks). Up until that point, the government was the only lender in town. Soon enough, these goldsmiths, merchants and “bankers” began trading something other than money: shares of stock.
A “stock certificate” as they became known, was literally proof of ownership of a small percentage of the company. If the company generated profits, all owners, however small their ownership, made a profit. To many of that time period, it made sense to own a piece of a company.
In the 18th and 19th centuries, there was only one company whose stock you would be interested in owning: the East India Company. They had a monopoly on trade of commodities such as tea, salt, cotton, silk and opium. This company was given the moniker “an empire within an empire,” portraying its prominence within the already massive British Empire. It is said that at one time the East India Company had a private army twice the size of the British military.
It made sense to own a shares of stock in the East India Company due to the fact they profited from products people used daily. Similar to Amazon ... if Amazon had a military. The East India Company originally sold stock certificates to raise money. They were sailing for months to years at a time, halfway around the world. It took money to buy the supplies and secure manpower. To purchase a share of stock was to help fund their voyage across the ocean. Upon their return if you owned a share of stock, you could share in the profits, or as we currently refer to it, receive a dividend. This was the inception of the Joint Stock Company as we understand it today.
When the stock market first began, the only two assets to buy and sell were equities and debt instruments. Equities are stocks, in their most basic form. You own a share (have equity) of the company. That company may pay you a dividend (profit) perhaps quarterly, annually, etc. Then, if at a later time you wish to sell that equity, you can do so for fair market price. If you sell it for more than what you paid, that’s a capital gain.
Debt instruments are bonds in their most simple form. If you buy a bond you are loaning that company (or government entity) money. The company will pay you interest for the use of your money in the form of coupon payments (most often twice a year). Once the bond (loan) comes due, the company returns to you the face value (principal). You are the debtholder and they pay you interest.
In the early days of the stock market, the most commonly traded asset was government securities such as war bonds from the Revolutionary War. It is not cheap to fight in a war, and the government needed money to finance food, fuel and bullets. When sales were weak for the bonds needed to finance World War I, our government enlisted Hollywood’s help for political gain. Politicians convinced megastars Douglas Fairbanks and Charlie Chaplin to help them sell “Liberty Loans.” A similar example can be seen when the comic book hero Captain America parades around the country selling war bonds for World War II.
Bonds were the first major player however stocks soon took over as the main attraction. Almost every other financial product you can invest in today is an offspring of the two basic concepts of stocks and bonds.
The stock market is simply a place to buy and sell shares of stocks and bonds (and other securities) from various companies and governments. Early investors in America were focused on commodities such as wheat, petroleum and, of course, gold. In addition, businesses were created to build railroads and turnpikes to help facilitate the expansion of life across the country. The western part of the United States was developed due to capitalism. The shares of stock of these companies were traded alongside the government bonds. Where these transactions took place came to be to be known as the New York Stock Exchange.
The NYSE traces its roots back to 24 men who met underneath a Buttonwood Tree in 1792. That meeting took place a mere six weeks after the passage of the The Great Coinage Act, the piece of legislation that was the foundation of our monetary system. Those 24 men held an extremely pivotal meeting that day; they created a place to exchange assets.
This marketplace fueled the Industrial Revolution. It would become the center of global economic trade.
In the last installment of this series, we will continue to unpack the stock market and discuss what role it plays in our everyday lives.
Jason C. Biance is co-owner and a Certified Financial Planner professional with J. Biance Financial in Sebring.