Among the most famous thoroughfares in the world, Wall Street is located in the southeast side of Manhattan in New York City. It is a narrow and relatively short street, running for 0.4 mile along nine blocks from a 19th-century church on Broadway down to South Street near the shore of the East River. Despite these geographic confines, Wall Street is lined with skyscrapers and historic buildings that signal the enormous influence and significance it has acquired over time in both American and international commerce. As a result of this historical evolution, Wall Street is not just a place, but it is also a symbol of everything connected to the operations of high finance in a global economic order.

What serves as the moniker of New York’s financial district originated in 1653 as a path alongside which Peter Stuyvesant, the governor of what was then the Dutch colony of New Amsterdam, built a defensive wall made of sharpened logs. Designed to protect the budding colony from attacks by British settlers in New England, the wall proved useless, as the British attacked New Amsterdam by sea in 1664, bringing about its surrender and renaming it to New York. When the wall was subsequently torn down in 1698, the lane beside it was employed to carry traffic and christened as Wall Street.

Even though it developed into a dynamic commercial and trading precinct under British rule, Wall Street did not become a hub of financial activity— in which savers and investors supplying capital are brought together with the firms and governments demanding it—until the early days of the new American republic. The federal government was then the chief demander of capital, having decided to assume the debts incurred by the Revolutionary War. It initially issued $80 million in bonds and these, along with state bonds, constituted the most actively traded securities of the day. Banks and insurance companies soon joined the trading mart where transactions were negotiated in coffeehouses and outside along the curbs of the street.

One of the banks traded, the Bank of New York founded by Alexander Hamilton, became the object of Wall Street’s first scandal. William Duer, a friend of Hamilton, sought to manipulate the price of Bank of New York stock, but ended up being ensnared by his own intricate machinations. In the wake of the scandal, a group of brokers met under a buttonwood tree, at what is now 68 Wall Street, to come up with an arrangement aimed at burnishing the image of the financial community. The result was the Buttonwood Agreement of 1792. In it, the brokers agreed to deal only with each other in the buying and selling of public securities at a fixed commission rate. This agreement constituted the foundation of the New York Stock Exchange (NYSE), the defining institution of Wall Street.

19th Century

The early 1800s witnessed the failure of two attempts to establish a central bank that could act as a “lender of last resort” to counteract a financial crisis on Wall Street. The first such attempt was the Bank of the United States, which operated for 20 years before its charter was revoked by Congress in 1811. Another effort was made five years later with the second Bank of the United States, but it also fell to political opposition fueled by a Jeffersonian suspicion of financial capitalism and federal concentration of power.

Much of the capital raising and trading during the 1800s was dominated by transportation issues, by which Wall Street enabled new markets to be opened and scale economies for ever-larger firms to exploit. Canal stocks, led by Erie Canal, excited investors and attracted capital from overseas, primarily Britain, whose London Stock Exchange would sway the financial tides on Wall Street for most of the 19th century. By the 1840s, railroad stocks came to the fore. To these were added mining shares, once the California gold rush gained momentum in the 1850s. After a fiat currency, the greenback, was instituted by the government to finance the Civil War, gold itself was traded, its price set in relation to greenbacks, the ratio varying with the fortunes of the Union cause on the battlefield.

Jay Gould, among a select coterie of audacious individuals who acquired notoriety on Wall Street for their speculative prowess, tried to corner this gold market. To forestall the U.S. Treasury from releasing its own gold reserves into the market, Gould actively schemed to ensure the conformity of government officials to his plans, even going so far as trying to coax the favor of President Ulysses Grant. The corner ultimately failed, but the stock manipulation and government corruption involved was symptomatic of the ethical morass that plagued Wall Street in the 19th century. Nor was it uncommon then for managers to use corporate treasuries as personal piggy banks, to engage in insider trading, and provide little in the way of proper accounting statements to investors.

As the 19th century drew to a close, industrial companies grew in prominence on Wall Street. In 1896, 12 of these companies were included in the Dow Jones Industrial Average (DJIA), published by the Wall Street Journal, now an internationally distributed daily that is Wall Street’s newspaper of record. The stock index it originated, since increased to encompass 30 stocks, remains the best-known barometer of Wall Street’s market movements, although investment professionals have come to prefer the Standard & Poor’s 500 Index for its broader coverage of America’s large capitalization firms.

20th Century And Beyond

Two events occurred in the opening third of the 20th century that would reverberate into the 21st. The first was the panic of 1907. Ignited by the failure of the Knickerbocker Trust Company, the public’s loss of faith in the financial system led to a series of bank runs, generating a liquidity squeeze that spread to banks and brokerage firms. J. P. Morgan, the head of Wall Street’s most influential bank, successfully piloted a rescue of the financial system through injections of liquidity. The lessons drawn from the panic overcame the century-old opposition to a central bank and in 1913 the Federal Reserve System was founded. Since then, particularly after World War II, the Federal Reserve’s moves have been closely scrutinized worldwide as harbingers of market direction.

The second crucial event was the 1929 crash and the ensuing Depression of the 1930s. Driven by radio, auto, and airline stocks, along with rhetoric about a “new era” in economic conditions, a bull market swept Wall Street in the 1920s. The DJIA reached a high of 381.17 in September 1929, up almost 500 percent from its 1921 low. However, prices fell dramatically the next month, culminating in a spectacular two-day, 25-percent drop on October 28–29. While economists now generally agree that the crash did not cause the Depression—the Federal Reserve’s tightening of monetary policy and the rise of trade protectionism are now commonly cited as the culprits—at the time, Wall Street was vilified for impoverishing the nation. Amid this hostility, the laissez-faire approach to Wall Street was ended with the establishment of the Securities and Exchange Commission (SEC). The fundamental rationale of this regulatory framework was, and remains, assuring that investors receive accurate and relevant information regarding public securities.

Not until the 1950s would Wall Street regain some of its luster, as the DJIA finally managed to overtake its 1929 high. By then, Wall Street had firmly displaced London as the center of international finance. Despite its role in deciding where and under what terms capital flows around the globe, Wall Street was not entirely impervious to international forces, as became evident in the 1970s, when higher oil prices triggered by the Organization of Petroleum Exporting Countries (OPEC) helped produce a stagflationary environment that saw the DJIA struggle to overcome the 1,000 milestone first breached in the mid-1960s.

Once the Federal Reserve successfully wrung inflation out of the U.S. economy with high interest rates in the early 1980s, Wall Street fully recaptured the exalted status it enjoyed in the 1920s, its practices and institutions emulated around the world, its capitalist ethos reinforced by the fall of Soviet communism. The DJIA finally broke through the 1,000 level in 1983 and continued to trend higher, ending the century above 10,000, making the October 1987 stock market crash appear as a mere blip on price charts. Indeed, toward the end of the 1980s–1990s bull market, the DJIA was overshadowed by the technology and internet stocks transacted on the NASDAq exchange, an over-the-counter market that now seriously rivals the NYSE.

Although not facing the same degree of ill will as in the 1930s, Wall Street began the 21st century under a cloud of skepticism about its role in the economy. A severe bear market in 2001–02 uncovered a myriad of investment banking and corporate scandals that sent numerous executives to prison. The Federal Reserve’s low-interest policy to combat the aftereffects of the late 1990s stock market bubble stoked a housing boom, which Wall Street helped finance with a slew of mortgage-backed securities. When the subprime segment of this market collapsed in 2007, Wall Street firms were forced to take huge write-downs, bringing about a credit crunch felt around the globe.

Wall Street currently faces a serious challenge from the City of London. The latter leads in foreign exchange trading, structured finance, new stock listings, and value of bonds traded. Wall Street, by contrast, continues to dominate in equities volume and the export of financial services.

Bibliography:

Robert F. Bruner and Sean D. Carr, The Panic of 1907 (Wiley, 2007);
Edward Chancellor, Devil Take the Hindmost (Plume, 2000);
David Colbert, Eyewitness to Wall Street (Broadway, 2001);
Anne-Marie Fink, Rules of the Moneymakers: What Wall Street Knows That CEOs Don’t (Crown Business, 2009);
Charles R. Geisst, Wall Street: A History (Oxford University Press, 1997);
John Steele Gordon, The Great Game (Simon & Schuster, 1999);
Doug Henwood, Wall Street (Verso, 1997);
Jeffrey B. Little and Lucien Rhodes, Understanding Wall Street, 4th ed. (McGraw-Hill Professional, 2004);
Julie Sell, “Magnets for Money,” Economist (September 15, 2007).

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