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Finance: Historical Perspectives

They controlled banking, railroad, insurance, and General Motors, Du Pont, and American Telephone and
power companies as well as great textile mills scat- Telegraph” (1990, p. xi).
tered all over the state. It was the large “modern”
corporation controllable by strategically organized
blocs of shares, and virtually self-perpetuating A VIEW FROM ENGLAND
boards of directors that made this concentration An English journalist, William Lawson, wrote an interest-
of power possible, but it must be remembered that ing account of finance in the United States in 1906. He
it was also this device for gathering together the declared in his introduction that he had studied American
savings of thousands of small investors that had finance for twenty-five years, traveled throughout the
produced the great development. (p. 220) United States, and seen most of its financial institutions
from the inside. He developed a highly favorable opinion
There were remarkable developments throughout the
of the astuteness of the leadership in finance. Among his
1800s. Jonathon Baskin and Paul Miranti, for example,
comments was:
pointed out that the “last quarter of the eighteenth cen-
tury saw the start of a great economic expansion that It is only a few years ago that New York was a
changed corporate finance in fundamental ways” (1997, financial satellite of London. How long will it be
p. 127). It was during this period that there was extensive before London becomes a financial satellite of
development of railroads, which independently became New York?… Till lately the idea prevailed that it
was to grow in the ordinary grooves, and was to be
strong bastions of finance capitalism. During this period,
like other countries, only much bigger. But that is
preferred stock and debt became popular means of financ- not to be its prosaic destiny. It is to be a country
ing corporations. During the final decades of the 1800s, of its own—a nation by itself.… Gradually, it is
relatively widely distributed financial journals and news- breaking loose from all European models and
papers began to appear. Such publications provided infor- precedents.… [T]he U.S … probably always will
mation for prospective investors. be, a country by itself is particularly true of its
finance. (p. 7)
U.S. FINANCE IN THE 1900S
The economic success of the United States at the turn of DISCONTENT EXPRESSED
the twentieth century was reflected in the optimism evi- The success of the American economy at the brink of the
dent in the U.S. secretary of the Treasury Lyman Judson twentieth century also introduced alarm because of the
Gage’s comment in the Annual Financial Review, a supple- growth of monopolies and the abuses of business as
ment to the New York Times (January 1, 1900). His obser- revealed by muckrakers, for example. Reporters, such as
vation was that “the year we have just passed through has Ida Tarbell (the story of Standard Oil) and Lincoln Stef-
been one of great prosperity, the future has no cloud.” fens (an account of civic corruption in Minneapolis) when
Much credit in providing resources was given to published in McClure in 1903 captured the attention of
banks. Joseph Schumpeter, in his theory of economic the public. The reform efforts of President Theodore Roo-
development, highlighted the role of bankers as the source sevelt in first decade were appealing to many citizens.
of funds for entrepreneurs, who themselves often lack At the same time, investors became increasingly inter-
financial resources. Schumpeter noted: “In an economy ested in corporate common stocks, as reported by Baskin
without development there would be no such money mar- and Miranti. As these historians noted, “New York Stock
ket.… The kernel of the matter lies in the credit require- Exchange statistics: total annual share turnover rose from
ments of new enterprises.… Thus, the main function of 159 million in 1900 to 1.1 billion at the height of the
the money or capital market is trading in credit for the 1929 boom” (1997, p. 167). The role of finance contin-
purpose of financing development” (1934, pp. 122–127). ued to be impressive.
Schumpeter undoubtedly was fully aware of the U.S.
experience and the influence of American bankers in the IMPETUS FOR REGULATION OF
impressive growth of the American economy from the SECURITIES IN THE UNITED
mid-1800s through the early decades of the twentieth STATES
century. Of the leaders in finance, some of the most Prior to 1929 there was little support for federal regula-
impressive of the bankers were the Morgans. As Ron tion of securities markets in the United States. As noted
Chernow, in his history of the Morgans, concluded: “The on the Securities and Exchange Commission (SEC) Web
old pre-1935 House of Morgan was probably the most site, “During the 1920s, approximately 20 million large
formidable financial combine in history. It financed many and small shareholders took advantage of post-war pros-
industrial giants, including U.S. Steel, General Electric, perity and set out to make their fortunes in the stock mar-

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