Posts Tagged ‘William Duer’

The Founding Scoundrel of the Stock Market

Posted in General on September 4th, 2009 by Eugene Finerman – 1 Comment

Our idea of a stock market–the trading of shares in a business–dates back to 17th century Netherlands.  To raise money for commercial ventures, Dutch merchants would sell shares of any profits from the business.  The speculation was whether the venture would prove profitable.  Ships sometimes sank, trade might be disappointing; there was always the unexpected.  And the difference  between the risk and the expectation–the nervous and the optimistic investor– created a market for those stock shares.  One of the Dutch ventures was a fur-trading outpost called New Amsterdam;  so New York City itself  began as a stock.

New Amsterdam was protected by a wooden wall.  Outside the northern boundary the Dutch set up an area for a market.  There, the Native Americans were welcome to trade; they were not trusted within the town itself.  However, it actually was an old European practice to have a market just outside a town’s walls.  Farmers, herders and merchants had room to set up their stalls, and the town did not have to worry about animals and strangers wandering through.  In fact, the word “stock” is derived from this arrangement.  An old English word, stock originally meant “log.”  Many towns and villages of medieval England were protected by wooden walls: a stockade.  Beginning as a slang term, the goods and produce sold outside the stockade came to be known as stock. 

The walls of New Amsterdam could keep out the Native Americans but not the English.  They conquered the colony in 1664 and renamed it for the Duke of York. New York City quickly grew beyond its original boundaries.  Where the northern stockade once stood, there now was an avenue called Wall Street; but it still remained a trading center.  By the 18th century, however, the transactions usually were done by contracts rather than the physical delivery of crops, livestock and merchandise.  If there were to be a market for stock shares, Wall Street would be the logical site.

While 18th century Britain had a stock market, its American colonies did not.  The thirteen colonies were an incongruous assortment.  Some were crown colonies, ruled directly by England.  Other were little more than personal estates; the Penn family ruled Pennsylvania.  Even among the crown colonies, the local governments and financial laws varied and clashed.  There was no common foundation for a national economy.  Ironically, America’s independence only made the incongruities worse.  At least under Britain, the colonies had a common currency.  In the newly independent republic, each state was a semi-independent nation, issuing its own currency and setting up tariffs for trade with the other states.  The Continental Congress, what passed for a central government, also issued currency which traded at one seventh of its face value. 

This economic chaos ended up with the adoption of the U.S. Constitution.  Among the powers of the new Federal Government  were “To coin money and regulate the value thereof….To regulate Commerce…All Duties, Imposts and Excises shall be uniform throughout the United States.”  In 1789 President George Washington entrusted these responsibilities to a 34 year-old New Yorker named Alexander Hamilton.  As the first Secretary of the Treasury,  Hamilton had inherited the debts of the Continental Congress: millions in devalued bonds.  He could have defaulted on them or paid them off at their depreciated market rate.  Instead of that, the Federal government assumed  and paid  all the debts at their face value.   Doing so, Hamilton established the financial reliability of the new government.  (A number of speculators–including friends of Hamilton–had the “foresight” to buy the discounted bonds and make a 600 percent profit.)  Hamilton also sponsored a reliable network for banking, establishing a central bank to regulate and facilitate transactions between regional banks.

Now that America had a sound financial foundation, investors were willing to trade bonds and stocks.  And within two years, America had its first stock market scandal.  The culprit was William Duer (1743-1799)  a New Yorker who attempted to corner the market in bank stocks.  Duer had a long, profitable and disreputable history as a speculator.   His bookkeeping never withstood examination and he was known to cheat his partners.  Yet he never lacked for investors.  In 1791, in his attempted stranglehold of bank stocks, he promised his backers to double their money in six months.  But in his aggressive buying of stocks, he soon ran out of his investors’ money and began taking millions in loans with no collateral other than wishful thinking.  Duer was dangerously overextended and very vulnerable.  In March, 1792, his creditors began to panic and demanded payment.  Of course, he could not.  His losses and debts amounted to five million dollars.  At the time, that was the property value of  New York City itself.  Duer voluntarily went to jail; he was safer there than on the street.  He spent the rest of his life in prison. 

Of course, Duer’s scandal had incriminated the entire stock market.  How could such a fiasco have happened in the first place?  Even Alexander Hamilton, a stalwart friend of capitalism and New York, said “There must be a line of separation between honest Men and knaves, between respectable stockholders…and mere unprincipled Gamblers.”  The stock market had yet to develop any procedures or regulations; in this unfettered environment Duer had first flourished and then bankrupted himself and much of the market.  If the New York investment community hoped to redeem its reputation, it had to establish a  system to monitor the market and enforce some sense of order. 

A buttonwood tree on Wall Street was a common meeting place for stockbrokers to conduct business.  There, on  May 17, 1792,  twenty-four stockbrokers signed an agreement that became the basis for the New York Stock Exchange.  They pledged the following:  “We the Subscribers, Brokers for the Purchase and Sale of the Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day to any person whatsoever, any kind of Public Stock, at least one quarter of one percent Commission on the specie and that we will give preference to each other in our Negotiations.” 

Historians call it the Buttonwood Agreement.  It is a single sentence, and a cumbersome one at that,  but it meant that they alone–no outsiders–would serve as brokers for the stock market, adhering to a code of conduct and commissions.  They would be the equivalent of a guild, setting and maintaining the standards of the stock market.  Their private association would not even have an official name until 1817, when its now 35 members adopted a more detailed code of business and named themselves the New York Stock and Exchange Board.    

Today, that association has some 1400 members and trades 2700 stocks.  It is the largest stock market in the world, quite a difference from a group that once could meet under a single tree.  But in those intervening centuries, the name of the New York Stock Exchange has barely changed and neither has the location.  The traders still meet at Wall Street, and the felonious spirit of William Duer lingers.