Financial History Issue 129 (Spring 2019) | Page 19

BUBBLES AND CRASHES The Great Democratization, the Great Kibosh and the Resurrection By Brent Goldfarb and David A. Kirsch In the early 1800s, an average worker in the United States would work for half a year before he would earn enough to pur- chase a single share of a stock on the New York Stock Exchange (NYSE). By 1995, the average worker would need to work only a few hours. While the trend is noisy, it goes down consistently. It is best measured in months throughout the 1800s, as the technology of trading slowly improved. But it wasn’t until the 1920s that democra- tization accelerated in a meaningful way. Additional regulatory, organizational and technological advances were needed for that next big leap. At least four additional factors led to continued and, in the 1920s, accelerated market democratization: the continued rise of industrials, the spread of the telephone, the emergence of national brokerage houses (in particular Merrill Lynch), a wide-scale marketing campaign by the NYSE and perhaps blue-sky laws to make trading and traded companies more transparent to shareholders. Trading floor of the New York Curb Exchange, 1915 The rise of industrials was swift, although it was certainly hampered by the Panic of 1907, and most likely that of 1893 as well. In 1900, NYSE unlisted stocks would com- mand about 33% of the value of the market and 80% by the 1920s. The decade of the 1920s was set for speculation in industrial securities. This story is echoed on the Curb Exchange: in 1911, half of all listings were oil or industrials; by 1920, the number had reached 80%. Like the NYSE, the number of companies traded on the Curb increased immensely. For every company traded on the exchange in 1900, there were 30 in 1930—the majority of this increase occur- ring after World War I. Shares of firms commercializing radio, airplanes and other new technologies all began trading on the Curb, moving to the NYSE only when they had become sufficiently large. Several oil-related innovations were listed on the Curb Exchange too, as were the Standard Oil trusts, apparently because J.D. Rock- efeller wished to avoid disclosure require- ments that had been initiated on the Big Board. While throughout the period the technology of investing made the markets much more accessible, and also disposable income increased, most of the rise in par- ticipation came after World War I. But in a surprising way, war policy itself may have attracted people to the markets. The Woodrow Wilson administration chose to finance the war in part through the direct sale of Liberty bonds to the gen- eral public. For many people whose mode of savings was putting their money in a jar, or perhaps opening a bank account, this was the first time they owned an intan- gible financial asset as an investment. The phenomenon was widespread. Estimates suggest that up to 25% of the population purchased the bonds. Then, throughout the 1920s, there was an ideological and business movement to enhance access to capital markets and create what became to be known as “citizens’ capitalism.” The primary vehicle was to sell shares to employees and customers, and literally millions of individuals became sharehold- ers through these programs—more than 500,000 in AT&T alone! There were hundreds of such programs operating throughout the first three decades of the 1900s. New technology played an important enabling role. In addition to the telegraph and associated ticker-related inno- vations, the telephone also contributed to the process of market democratization. One of the most valuable business franchises to emerge from Western Capitalism in the 19th century was Alexander Graham Bell’s Amer- ican Telephone & Telegraph. The telephone had a profound impact on communication, so it is not surprising that it also influenced how investors accessed financial markets. Telephone, telegraph and ticker—in con- junction with the spread of local brokerage houses—allowed individuals to trade stocks on the NYSE from anywhere in the country. During the 1920s, members of the NYSE opened up brokerage houses across the United States (and the world). By 1900, NYSE members had brokerage offices throughout the city and country, 370 of them to be exact. By 1914, there were 414, but after the war the Big Board greatly expanded its reach. There were 663 in 1920, then 1,053 in 1928 and 1,200 in 1930. The market leader of this movement was Charles Merrill, and he led through the expansion of his firm, Merrill Lynch. The brokerage represented consumer-facing companies and promoted their shares to its customers. As described by financial journalist Joe Nocera, Merrill Lynch’s “small custom- ers were investing in the same stores they were shopping in.” Charles Merrill both promoted chain retailers’ shares and www.MoAF.org  |  Spring 2019  |  FINANCIAL HISTORY  17