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Finance: Historical Perspectives

ket. It is estimated that of the $50 billion in new securi- providing false or misleading information about securities
ties offering during this period, half became worthless” and the companies that issue them.
(SEC).
Public confidence shifted dramatically with the stock THE ROLE OF STOCK EXCHANGES
market crash of 1929. For the economy to recover, the Stock exchanges have played a significant role in the
public’s faith in the capital markets needed to be restored. financing of U.S. business enterprises through providing a
The outcome was the passage of two acts by Congress, the means of buying and selling securities. The first stock
Securities Act of 1933 and the Securities Exchange Act of exchange in the United States was established in 1790 in
1934. These laws were established to provide structure in Philadelphia. Two years later, the New York Stock
the functioning of financial markets and to provide gov- Exchange (NYSE) was formed when twenty-four stock-
ernment oversight. brokers signed an agreement to trade with one another
beneath a buttonwood tree outside what is now 68 Wall
CHANGES IN FINANCIAL Street. The NYSE is the largest stock exchange in the
world.
STRUCTURE
The role of banks changed during the twentieth century The NYSE’s first client, in 1792, was the Bank of
New York, and its first office, set up in 1817, was a rented
as businesses became larger and the types of financial
room at 40 Wall Street. It achieved its first million-share
institutions increased. Raymond Goldsmith’s 1969 study
day on December 15, 1886, and its first billion-share day
provided a comparison of the main types of U.S. financial
on October 28, 1997.
institutions in 1900 and 1963. Goldsmith’s analysis
revealed that in 1900, 62.9 percent of total assets of all the A study of all securities markets by the SEC in 1961
financial institutions were held by commercial banks; by revealed that the over-the-counter securities market was
1963 that percentage was 32.2. Thrift institutions, includ- fragmented and obscure, leading the SEC to propose to
the National Association of Securities Dealers that it
ing mutual savings banks, savings and loan associations,
develop an automated over-the-counter securities system.
credit unions, finance companies, insurance organiza-
Such a system was completed and began operations in
tions, and investment companies were active participants
February 1971; it is known as the National Association of
in financial services.
Securities Dealers Automated Quotations (NASDAQ)
Shares of assets held by banks and thrift institutions
system. The world’s first electronic stock market, by the
continued to decline. While the two types of financial end of 1999 it ranked second, below the NYSE, among
institutions held 55 percent of total assets in 1963, the the world’s securities markets in terms of dollar volume.
two types held only 22.7 percent by the end of 1999, as Technological advances have introduced online buying
reported by the Federal Reserve Board. The Federal
and selling of securities.
Reserve Bank has been a critical participant in all aspects
of finance in the United States through its monetary and
THE BEGINNING OF THE TWENTY-
credit policies.
FIRST CENTURY
The new century began with stunning disclosures of cor-
THE ROLE OF THE SEC
porate scandals. Such disclosures vividly revealed the inad-
The Securities Exchange Act of 1934 included the estab- equacy of the rules and regulations of corporation
lishment of the SEC, which was charged with enforcing reporting. No objective, thorough investigation of the
the newly passed securities laws, promoting stability in the alleged fraud in financial reporting existed.
markets, and protecting investors. The SEC operates on Congress, however, passed the Sarbanes-Oxley Act of
the premise that all investors should have access to certain 2002, which changed markedly the regulatory environ-
basic facts about investments prior to purchase. The key ment in which publicly owned corporations function in
means of achieving this is through requiring that all pub- the United States. The act established a new governing
licly owned companies disclose relevant financial and board, the Public Company Accounting Oversight Board.
other information to all citizens. That board assumed all professional responsibilities,
The SEC oversees key participants in the financial including those earlier delegated to the public accounting
world, including stock exchanges, broker-dealers, and profession. The board has responsibility for auditing rule
investment advisers. Through its enforcement authority, making and for monitoring of all publicly owned corpo-
the SEC brings civil enforcement actions against individ- rations reporting to the SEC.
uals and companies that violate securities laws. Typical The opinions of the success of the new regulations are
infractions relate to insider trading, accounting fraud, and mixed. As of the end of 2005, there continued to be

306 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION