The Great Game: The Emergence of Wall Street as a World Power: 1653-2000by John Steele Gordon
For more than two hundred years, fortunes have been made -- and lost -- on Wall Street by men and women playing the great game of capitalism. Many have repeated the mistakes of their forebears, and some have enjoyed similar triumphs. In this gripping and informative book, John Steele Gordon tells history lovers, armchair investors, financiers, and day traders alike everything they need to know about Wall Street's wild ride to power.
Wall Street began as the northern line of defense for a wilderness trading post, at a time when money was limited to gold, silver, and Indian wampum. Today, Wall Street is a metaphor for the global financial market, and money exists mostly on computer screens. More than three million Americans are now employed by the securities industry, and Wall Street wields the sort of power once reserved to nation states. How did an unimpressive little byway become so formidable? In this richly textured narrative history, John Steele Gordon brings to life the remarkable cast of bankers and brokers, visionaries and crooks who made it happen.
Nature gave New York one of the world's great harbors, and the Dutch founders gave the city its enduring love of making money. In pursuit of that love, New Yorkers began meeting under the trees and lampposts of Wall Street to buy and sell securities. As the country expanded westward, canal and railroad companies came to Wall Street looking for capital. Later still, manufacturers came as well, and, by the beginning of the twentieth century, the United States had the mightiest national economy in the world. No small part of that development was due to Wall Street, which, time and again, has demonstrated how Adam Smith's invisible hand turns the pursuit of economic self-interest into common wealth.
Gordon tells the fascinating stories of the key players of the Great Game, including Jacob Little, the first great Wall Street plunger; Commodore Vanderbilt, the Street's greatest tactician; Hetty Green, the "richest woman in the world," who was terrified of being poor; J. P. Morgan, the country's most important banker, who twice saved it from economic disaster when the government couldn't; Richard Whitney, the president of the New York Stock Exchange, who was a thief; and Charles E. Merrill, who brought Wall Street to Main Street and transformed both in the process. From Alexander Hamilton to Michael Milken, the history of Wall Street is a history of risk, courage, avarice, patriotism, power, genius, and even, occasionally, remarkable stupidity.
Wall Street has finally found a biographer worthy of her extraordinary story in acclaimed business historian John Steele Gordon. As more and more Americans invest their money in the stock market, The Great Game is a lively and absorbing account of how Wall Street became a crucial part of all our lives.
Christian Science Monitor
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Chapter One: "A Cloacina of All the Depravities of Human Nature"
Among its innumerable other distinctions, New York is the only major city in the United States ever to have been walled.
By the 1650s, less than thirty years after its founding, Nieuw Amsterdam was becoming so prosperous that the English colonies in New England were beginning to covet the Dutch trading post in the middle of one of the world's largest and most splendid natural harbors. Even more threatening to Nieuw Amsterdam's future, the First Anglo-Dutch War had broken out in 1652.
The Dutch governor of the colony, Peter Stuyvesant, had been a soldier and thought like one. Fearing a land attack from New England, he decided to build a defensive wall on the town's northern edge. He borrowed six thousand guilders from local merchants and ordered every able-bodied man to assist in its construction. Made of sixteen-foot logs sunk four feet into the ground and sharpened at the top, the wall stretched from Pearl Street (which was then at the shoreline) on the east, 2,340 feet to what is today the western edge of Trinity Churchyard. There the land fell off sharply to the Hudson River, forming a natural defensive barrier. Gates were built at the East River, where most ships off-loaded, and at Broadway, the main land route north.
When Stuyvesant presented the bill for the wall to the brand-new city council (established only on February 2, 1653) for payment, however, the members balked. The newly appointed, self-important council members said the bill for the wall was the problem of the Dutch West India Company, which owned the colony, and refused to pay it. Not until Stuyvesant agreed to turn over the revenues from the tax on liquor in compensation did the council agree to pay for the governor's wall.
But like many a soldier before and since, Stuyvesant had failed to take sea power into account. When the English finally attacked the city, in 1664, they did not do so by land from the north, as Stuyvesant had feared and prepared for. Instead, an English fleet sailed up the harbor from the south and put the town under its guns, which far outnumbered those of Fort Amsterdam at the island's tip.
Stuyvesant, undaunted if outflanked, was prepared to defend the town no matter what the cost. But the local merchants -- including his own son -- were not. They signed a petition to the governor calling on him to surrender the city rather than have it -- and their fortunes -- destroyed. With great reluctance, Stuyvesant agreed. The next day, his beloved Nieuw Amsterdam became New York, so named because it was given as a birthday present to James, Duke of York, the younger brother and heir of King Charles II.
Stuyvesant remained in New York, living on the farm he had established far north of the city until his death in 1672. That farm, which ran from what is now Fifth Street to Seventeenth Street, Park Avenue to the East River, would make his descendants a wealthy family in the nineteenth century.
The wall, now completely useless, soon fell into disrepair and was torn down in 1698, the year the first Trinity Church was built at its western end. Had that been all there was to it, the wall would have been no more than a minor footnote in history. But on the ground immediately behind the wall, a space of one hundred feet had been reserved for troop movements, with no building allowed. As crosstown traffic was already a problem in Manhattan, just as it still is, this space was quickly and inevitably utilized as a cross street and, just as inevitably, came to be named Wall Street. That little street, thanks to another Dutch legacy to New York, would go on to become one of the most famous thoroughfares in the world.
That second legacy was the town's fundamental character. The Dutch invented modern capitalism in the early seventeenth century. Although many of the basic concepts had first appeared in Italy during the Renaissance, the Dutch, especially the citizens of the city of Amsterdam, were the real innovators. They transformed banking, stock exchanges, credit, insurance, and limited-liability corporations into a coherent financial and commercial system. The resulting explosion of wealth in turn transformed the tiny Netherlands, briefly making it one of the great powers of Europe.
It was in the Netherlands that the early techniques of stock-market manipulation were developed, such as short selling (selling stock one doesn't own, in hopes of a fall in price), bear raids (where insiders conspire to sell a stock short until the outsiders panic and sell out their holdings, allowing the insiders to close their shorts profitably), syndicates (where a group manipulates a stock price by buying and selling among themselves), and corners (where a person or syndicate secretly acquires the entire floating supply of a commodity, forcing all who need to buy the commodity to do so at their price).
And it was in the Netherlands that the eruption of "tulipomania" caused the first recorded financial bubble. Soon after the tulip was introduced into western Europe in the middle of the sixteenth century from Turkey, a craze had developed for the flower. By the early seventeenth century the prices of the more prized varieties had risen to remarkable heights, as the rich competed to display the latest and rarest varieties in their gardens. By the early 1630s, the fad had created a classic speculative madness. Tulip bulbs were being bought not for their inherent value or even their beauty, but in expectation of a continuing increase in price. (The idea that there will always be someone willing to buy an asset at a higher price than was paid for it has long been known as the Greater Fool Theory of investing.)
In 1635 a variety known as Childer was selling for 1,615 florins. To get some idea of what that sum meant in the economy of early-seventeenth-century Holland, consider that a team of four oxen, the equivalent of a tractor, could be had for 480 florins. A thousand pounds of cheese cost 120 florins. Nevertheless, the prices of tulips only continued to rise, and the following year, a single bulb of a particularly rare variety (only two bulbs were in all of the Netherlands at the time) sold for 4,600 florins plus a new carriage, two gray horses, and a complete set of harness.
But since all financial bubbles are as flimsy as their real-world namesakes, the tulip bubble burst when someone realized that, because speculation does not create wealth but only transfers it, a day of reckoning was inevitable. When that nameless person sold out (or, more courageously, sold short), others followed, and soon the frenzy to sell equaled the earlier frenzy to buy. Prices crashed and thousands were ruined in the ensuing debacle.
It was the sort of people who could precipitate such an event in Europe that founded the little colony at the mouth of the Hudson in North America. From the very first it differed from most of the other colonies that were planted on North America's eastern seaboard in that century. The Puritans of New England, the Quakers of Pennsylvania, the Catholics of Maryland, all came to the New World to worship God as they chose. In each case, the colonists' first task, as they saw it, was to build a shining city on a hill, a community to be emulated for its piety and morality.
But when the Dutch set up shop -- quite literally -- in their new colony, their purpose was only to make a buck. So busy were they pursuing wealth that they didn't even get around to building a proper church for seventeen years. (When they finally did, they named it for St. Nicholas, and Santa Claus has been the occasionally inattentive patron saint of New York ever since.)
New York's distinct origins and character produced a tension between it and other colonies quite early on. Even when New York extended no farther up Manhattan Island than St. Paul's Chapel at the foot of City Hall Park, Thomas Jefferson called the city "a cloacina of all the depravities of human nature." This tension is noticeable even today. To the rest of the country, New York is often regarded as the epitome of all that is wicked and dangerous. To New Yorkers, the rest of the country is morally smug and, above all, boring.
The Dutch were very successful at first. Many of the new colonies were established by joint-stock companies -- the forerunners of the modern corporation -- that had been especially created to found a colony. All these companies soon went broke, and the colonies they founded were taken over by the crown. But the Dutch West India Company was already well established and rich from sugar and slave trading. And while the company spent twenty thousand guilders formally establishing the colony, the first shipload of furs sent back from Nieuw Amsterdam was valued at forty-five thousand guilders, a return on investment of 125 percent.
The company profits did not last long, however, thanks mostly to frequently incompetent government -- another, less fortunate inheritance New York would get from its Dutch forebears. But the individual citizens of the colony fared far better. A purely commercial enterprise founded by the live-and-let-live Dutch, Nieuw Amsterdam soon possessed a cosmopolitan character. When Peter Stuyvesant, a pious member of the Dutch Reform Church, tried to expel the Jews and the Quakers who had settled in Nieuw Amsterdam, the company told him in no uncertain terms to mind his own business, so that the Jews and the Quakers could tend to theirs. A French priest visiting in the 1640s, when the town's population was still well under a thousand, counted no fewer than eighteen languages being spoken by people on its streets. They were all there to make money. Besides furs, commodities such as flour, slaves, lumber, and myriad others were also being traded in Manhattan before long. Its merchants, already firmly linked to the markets of northern Europe, soon sought to buy cheap and sell dear in the Mediterranean, the West Indies, and even the Indian Ocean.
Thus, when the town was taken over by the English, its citizens remained just as interested in money as they had ever been. They adjusted quickly and easily to English rule and English laws, and today it might seem that the Dutch left only a few place names, such as Spuyten Duyvil and Brooklyn; a few words, such as cookie; and a few personal names, such as Roosevelt, to mark their forty years on the Hudson. But that is not true, for they left their commercial spirit as well.
Today, somewhere deep within New York's mighty metropolis -- like the child within the adult -- there lives on still that little, hustly-bustly, let's-make-a-deal place that was Nieuw Amsterdam. And the making of money -- for good and ill -- is still the city's dearest love.
That spirit was evident as early as 1666, only two years after the English seized control, when Frederick Philipse orchestrated the first financial coup in North America by cornering the wampum market.
Philipse was born in Holland in 1626 and moved with his father to Nieuw Amsterdam in 1647. Trained as a carpenter, he actually helped to construct the wall a few years later. But Philipse did not remain a carpenter for long. Instead, he took one of the royal roads to wealth and married a rich widow. Armed with his wife's money, he began to trade in various commodities with the local Indians, with the West Indies, and with the mother country. He soon demonstrated a keen understanding of the marketplace.
The Indians provided the furs that were the mainstay of the colony's economy at that time. But they did not want to be paid for them in gold or silver. These metals, dear as they were to the hearts of Europeans, were unknown to them and therefore worthless. Instead, they demanded payment in what they regarded as "real money": wampum. Wampum were tubular beads, usually strung together in intricate patterns, that were made from the shells of the freshwater clams that abounded in the rivers and lakes of eastern North America.
In 1650, six white beads or three black beads were worth one Dutch stuiver. (Equal to one-twentieth of a guilder, a stuiver was, in effect, the Dutch equivalent of a nickel.) Unfortunately for the Dutch traders, inflation set in, and by 1659 it took sixteen white beads to equal a stuiver. This played havoc with the local economy, not only because the cost of furs skyrocketed, but because the settlers as well as the Indians used wampum in day-to-day transactions. Governor Stuyvesant tried to fix the problem with the usual government remedy, price controls. And he achieved the usual results -- the price controls were ignored. Then Frederick Philipse began buying up wampum and taking it out of circulation. In fact, he buried it in hogsheads. In a matter of weeks he controlled the market in wampum and succeeded in raising its price dramatically. By 1666 it took only three white beads to equal a stuiver.
The very concept of a central bank would not develop until the end of the seventeenth century (the Bank of England was founded in 1694). But Frederick Philipse was, in effect, acting as one more than three decades earlier by regulating the money supply and, doubtless, making a tidy profit in the process. He would go on to become New York's richest citizen (marrying a second rich widow along the way), with trading interests as far afield as the East Indies and Madagascar.
As for wampum, it continued to be commonly used in New York as a currency until shortly before the American Revolution. Then a machine was invented that cheaply manufactured counterfeit wampum, destroying the value of the real article.
New York's commercial-mindedness and live-and-let-live attitude did not make it an easy place to govern, then or now, and its citizens were soon known for their tendency to riot. It remains to this day the only American colony or state to have hanged a governor, Jacob Leisler. The Navigation Acts, first passed in 1651, were meant to ensure that the American colonies operated for the benefit of the mother country. They forbade most manufacturing and required foreign goods to first pass through British ports (paying British tariffs). But they were spottily enforced at first and, when they were, were often evaded with a timely bribe or a clandestine unloading in New York Harbor's infinity of coves and brooks. The colony flourished.
By the time the wall was torn down, Manhattan had a population of 4,937 (according to the first census ever taken in North America). Most lived at the southern tip of the island, and Wall Street was distinctly uptown. But with the construction of Trinity Church and then, in 1700, the second City Hall, on Wall Street at the head of Broad Street, the western end became a fashionable place of residence.
Only at its eastern end, at the Pearl Street waterfront, was Wall Street commercial. The first commodity regularly traded there in quantity was slaves. New York was the only northern colony to have a large slave population (14 percent of Manhattan's population in 1698), but the city also acted as an entrepôt, shipping slaves south to Virginia and the Carolinas.
Along with furs and slaves, grain also became important to the New York economy after settlers discovered that wheat thrived in the Hudson Valley. Much of this grain, in the form of flour and biscuit, was exported to the West Indies in exchange for molasses and rum. So important did flour become to the New York economy, in fact, that there is a flour barrel along with a beaver on the city's coat of arms. New York also sent such commodities as whale oil and tobacco to England in exchange for manufactured products that could not be obtained locally.
It is hardly surprising that New York was a bustling port. Its harbor was beyond compare, with miles of shoreline, deep water, and instant access to the open sea through the Narrows. Further, the Raritan and Hackensack Rivers in New Jersey, the Hudson River in New York, and Long Island Sound funneled traffic into New York. In 1699, the governor, Lord Bellomont, called New York "the growingest town in America." That was, however, a slight exaggeration. Oceangoing ships in the seventeenth and eighteenth centuries were still small enough to use the many other harbors in the New York area, such as Oyster Bay and Southampton on Long Island, and the towns on the Hudson River, such as Peekskill, that today are not thought of as ports at all.
Moreover, not long after it was founded in 1680, Philadelphia had a larger population and was the only port serving the rich Pennsylvania farmland. Meanwhile Boston served the populous New England countryside, and Charleston had an unusually rich export economy in rice and indigo. Thus toward the end of the colonial era, New York, however commercially ambitious its population, ranked only fourth among colonial ports. In 1770, Philadelphia imported 47,000 tons of cargo, Boston 38,000, and Charleston 27,000. New York imported just 25,000 tons that year.
And while New York was an active port with a thriving commerce, it was not yet a financial market. The American colonial economy grew by leaps and bounds in the eighteenth century. (That, of course, is precisely why the British government wanted so much to start taxing it, setting off a train of events that led to the American Revolution.) It exported one-seventh of the world's pig iron and possessed a merchant marine that was second in size only to that of the United Kingdom itself. But it was in many ways a primitive economy. There were no banks in the American colonies because the British forbade their establishment. Nor was there, in any real sense, a money supply, other than the wampum that served as currency in some areas.
Bank of England banknotes were not found in the colonies, nor were, to any great extent, British coins. Instead the money supply consisted of a hodgepodge of foreign coinage, paper money issued by colonial governments, and such expedients as tobacco warehouse receipts, which circulated widely in the southern colonies. The most common coin was the Spanish real. Reales, made of silver, were often called pieces of eight because they were frequently cut into halves, quarters, and eighths to supply small change. That is why a quarter is still known as two bits, and why the New York Stock Exchange until recently quoted prices in eighths, not tenths, of a dollar.
New York's position as a major port and commercial center was devastated by the American Revolution. New York was the only American city occupied during the war for an extended period, over seven years. (Indeed, no other city in modern times has been occupied by enemy forces for so long.) Those merchants who were patriots had little choice but to leave the city, and their businesses, behind. The loyalist merchants who stayed and did business with the British were forced to leave in turn, when the Americans finally reoccupied the city on November 25, 1783, a date that would be New York's major local holiday for the next century.
The physical destruction rivaled the devastation of New York's commercial strength. During the British occupation, two fires swept the city. The first, on September 21, 1776, began at the foot of Broad Street and roared unchecked up the island's west side, burning down about one-third of the developed area before it died out. Numerous commercial structures were destroyed, as were 493 houses and the first Trinity Church, which remained a blackened ruin for fifteen years afterward. The second fire, on August 3, 1778, destroyed sixty-four more buildings in Cruger's Wharf, a busy commercial area on the East River.
In all, during the turmoil of the Revolution, New York's population fell by more than half and its GDP (not that such a statistic then existed) fell by at least as much. But once the war was over and the British departed, the city recovered with astonishing speed. Its population was back to prewar levels in only four years as old residents returned and new ones were attracted to its tolerant, money-minded ways. The twenty-one-year-old John Jacob Astor, a native of Waldorf in Germany's Rhineland, came in 1784. And a steady stream of New Englanders, leaving the region's small towns, began moving to outward-looking New York in these years, rather than to stuffy, self-satisfied Boston. In 1790, the country's first national census revealed that New York had surpassed Philadelphia in population.
These newcomers continued New York's tradition of being a city of immigrants, as, indeed, it still is. The most famous of New York's eighteenth-century immigrants came earlier, however, in 1772. This was Alexander Hamilton and he would have the most influence on New York's future as a commercial center and financial market.
Hamilton was in many ways unique among the founding fathers. He was the only one not born in what is now the United States. Instead he was born on the island of Nevis, in the British West Indies. And except for the by-then venerable and world-respected Benjamin Franklin, he was the only one not born rich. In fact, in John Adams's memorable if not altogether accurate phrase, Hamilton was born "the bastard brat of a Scotch pedlar."
Hamilton was indeed a bastard, but his father was not a peddler, just an incompetent businessman. As a younger son of the laird of Cambuskeith, Hamilton's father sprang from a family far more ancient and more distinguished than Adams's own. But he soon deserted his mistress and her two sons, and Hamilton's mother opened a small store in St. Croix, then part of the Danish Virgin Islands, to feed herself and her family.
Hamilton went to work, at the age of nine, for a New York merchant named Nicholas Cruger, who operated a trading post in St. Croix. Cruger was mightily impressed with the highly intelligent and ambitious youth. When Cruger returned to New York because of his health, he left Hamilton, aged only thirteen, in charge. Two years later, he paid for Hamilton's passage to New York. It would be his home for the rest of his life.
Hamilton studied at King's College (now Columbia University), trained in the law, and served as an aide-de-camp to George Washington during the Revolution. When Washington became president, he asked Hamilton to be his secretary of the treasury, the post that would have to deal with the most pressing problem facing the new republic: its chaotic finances. This Hamilton did, and in an astonishingly short time.
While the Continental Congress had been able to borrow from France and the Netherlands to buy arms in those countries, it had not been able to sell nearly enough bonds domestically to finance the war. Instead it had no choice but to resort to forced loans, requisitioning supplies and paying for them with IOUs, and to issue fiat money, the so-called continentals. This paper money was money only because the government said it was. And as fiat money always does, the continentals induced a great inflation. Within a few years, Congress had to revalue earlier issues at only 2.5 percent of their face value. For a hundred years and more, the phrase "not worth a continental" would be part of the American vocabulary.
There had been speculation in the bonds, IOUs, and continentals in New York and elsewhere even while the war (and the British occupation of New York) continued. Speculators held auctions in these securities at coffeehouses (where so many financial institutions had been born, including the London Stock Exchange and Lloyd's of London), but they were sporadic and informal and attracted little attention. But when Hamilton began to construct the financial underpinnings of the country under the new Constitution, speculation in these securities became one of the country's first great political issues.
Hamilton wanted to do three things. First, he sought to establish a federal tax system to provide a dependable revenue stream. (Under the old Articles of Confederation, the federal government lacked the power to tax and was obliged to ask the states for money.) Second, he wanted to refund the national debt, both foreign and domestic, and the debts incurred by the several states during the war, on generous terms by issuing new bonds on the full faith and credit of the United States. Finally, he envisioned a central bank, modeled on the Bank of England, to act as the government's fiscal agent and as a regulator of the country's money supply.
The group of politicians who would soon be known as Jeffersonians, after their most distinguished leader, bitterly opposed Hamilton. They felt that the speculators, who had bought the old bonds and other paper at low prices, should not be allowed to profit by having them redeemed at higher prices. Only the original bondholders, the Jeffersonians argued, should benefit. This was hopelessly impractical, as it would have been, at the least, time-consuming, and quite often impossible, to determine who the original holders were.
The refunding act passed Congress, but not without a good deal of horse-trading. For instance, to get the Jeffersonians to accept the refunding of the state debts, Hamilton had to sacrifice the chance of making New York the new federal capital. (While it is, of course, impossible to know how history would have developed had New York become the country's political capital as well as its commercial, cultural, and financial one, there is no doubt that this country, and New York City as well, would have been a very different place.)
Once Hamilton's program was in operation, the effect on the economy of the new United States was extraordinary and immediate. But a bitter legacy among his opponents has lasted to this day. In fact, the whole history of American politics can largely be seen as the ongoing battle between the Hamiltonians and the Jeffersonians. Because Wall Street became the center of American finance, it became to a large extent the symbol for all that the Jeffersonians and their heirs -- from Andrew Jackson to William Jennings Bryan to Ralph Nader -- thought wrong with the country.
But that was in the future. In the 1790s what mattered was that Hamilton's program caused the American economy to flourish. In the 1780s the United States had been in financial chaos, not altogether dissimilar to Russia today. But by 1794 it had the highest credit rating in Europe, its bonds selling at a 10 percent premium over par. Talleyrand, soon to be the French foreign minister but then in exile in this country from the Terror, explained why. The new bonds, he said, were "safe and free from reverses. They have been funded in such a sound manner and the prosperity of this country is growing so rapidly that there can be no doubt of their solvency."
Although by the 1790s it was growing much more slowly than New York, Philadelphia remained the country's financial center. The first bank in the country, the Bank of North America, had been formed there, and the first stock exchange in the country, the Philadelphia Stock Exchange, was organized in 1790. Because Philadelphia was to be the nation's capital for ten years, while Washington was under construction, Hamilton's central bank, the Bank of the United States, was established there in 1791 as well.
But under Hamilton's program, New York's financial activity also greatly increased, and the pieces were all in place. New York's commerce was growing swiftly, as was its population. National as well as local prosperity was on the rise. Merchants had more and more need for credit, insurance, and other financial services. Alexander Hamilton himself had founded New York's first bank, the Bank of New York, in 1784. Hamilton's program provided a reputable and unified money supply and a predictable value to the currency. Speculators and brokers, familiar with finance and risk, were looking for opportunity and profit. They were ready, willing, and able to provide the liquidity all financial markets need. And the speculative techniques bequeathed New Yorkers by their Dutch ancestors were there for the taking by the bold and the artful.
A city, a street, and destiny were coming together.
Copyright © 1999 by John Steele Gordon
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