Bridge over ocean
1 June 2017 CFA Magazine

Historical Curiosities of Wall Street: A Brief Guide

  1. Ralph Wanger, CFA
"In 1870, the United States was a very different country, and the NYSE was a speculator's playground. … Almost no financial information was available to the public except for the dividend on a stock—rumors and market-share corners created an atmosphere that was much more like a commodity trading floor than the sedate industry we have now."
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A few weeks ago, one of my friends sent me an ancient book: Men and Mysteries of Wall Street by James Medbery, published in 1870. I told my friend that I had gone into the mutual fund business in 1970, not 1870, but he knew I was a history buff. In 1870, the United States was a very different country, and the NYSE was a speculator’s playground. The Civil War had ended only five years earlier, and President Grant had the Federal Army trying to suppress the Ku Klux Klan in the South. The leading technology was the rapidly expanding railroad network; the transcontinental railroad had just linked California with the eastern states in 1869, allowing for easy settlement of the western US for the first time.

Trading on the New York Stock Exchange at that time reflected the popularity of railroads. Most of the listed stocks were railroad companies. The whole market was very speculative: individuals trading on margin, lots of short selling. Bull- and bear-market speculators made fortunes, only to go broke a few months later. Almost no financial information was available to the public except for the dividend on a stock—rumors and market-share corners created an atmosphere that was much more like a commodity trading floor than the sedate industry we have now.

The enabling technology for the stock market was the telegraph; it allowed for instant communication across the country, and by 1858, across the ocean as well. Before 1840, news traveled only as fast as a sailing ship could carry a mail sack. This lag allowed some colorful arbitrage opportunities. For example, in 1820, the NYSE was just being organized as a practical enterprise, copying the successful Philadelphia Board. Three traders from New York hired a stagecoach to take them to Philadelphia. Just before they left, a ship from London arrived with bullish news. While on the stagecoach, the traders realized that Philadelphia could not have heard this news yet, so they sped to Philly before the market closed and bought all the stock they could. The three scalped a nice profit, because the unsuspecting Pennsylvanians had not heard the London news.

Some of the shrewdest and most crooked traders of the day were Daniel Drew, Jim Fisk, and Jay Gould. They loved to manipulate Erie Railroad stock. Though the Erie was a marginal railroad, Erie stock was a marvelous toy for speculators. The book mentions William M. Tweed as a rising stockbroker. He was also becoming a major political figure and ran New York City as “Boss” Tweed in the 1870s. Tweed conspired with Fisk and Gould to swindle Cornelius Vanderbilt out of his control of the Erie by counterfeiting Erie stock (a marvelous bit of skullduggery described by Henry Adams in Chapters of Erie in 1871).

Thomas Durant, a vice president at Union Pacific Railroad, had “an enviable reputation for financial boldness, quickness, insight, and Dantonian audacity in execution”—meaning that he constructed several railroads while building his own fortune as well. He was one of the first to realize that constructing a railroad was a different business from operating a railroad. In 1864, when it was time to start building the First Transcontinental Railroad, he separated the Union Pacific Railroad from the construction company, Crédit Mobilier. Durant hired Major General Grenville Dodge, who ran the railroads in the occupied South during the Civil War, as the construction manager. Dodge laid track across the prairies at an astounding four to seven miles per day, forcing Crédit Mobilier to sell an enormous quantity of bonds to finance the construction. Durant appears to have siphoned a little too much money out of the project and was fired in 1869, but the US got its railroad.

The Jerome brothers, Addison and Leonard, grew up on a small farm in upstate New York and then moved to New York City in the 1850s to make their fortune. Unfortunately, Addison died young, but his younger brother Leonard went on to pioneer the stock-tout business, writing financial news for James Gordon Bennett of the New York Herald. Along with an old business and social friend of Addison’s, August Belmont, Leonard built the Jerome Park Racetrack. The Belmont Stakes was first run at that track in 1867.

Leonard Jerome had three lovely daughters, who were raised in upper-class New York circles. Jeanette, known as Jennie, was very fond of Europe and went to London, where she met and married Lord Randolph Churchill, a British statesman. Shortly after their marriage, she gave birth to Winston Churchill, whose exploits are too long for this column.

The aforementioned August Belmont was born in Germany to a Jewish family named Schönberg. He came to New York City in 1837 and became the American agent for the Rothschild banking family. Belmont became wealthy and was named a diplomat. He married Caroline Perry in 1849. Caroline’s father was a naval officer who became world-famous in 1853 when, as Commodore Perry, he commanded the expedition that opened up the trading ports in Japan.

The climax of the Medbery book was a sensational bull corner in the gold market. Because the country was on the gold standard, there was always speculation about Treasury programs to buy or sell gold bullion. Our friends Fisk and Gould bought gold heavily, attracting short sellers. The ring kept buying gold, creating a corner, a short squeeze that broke the bears. A Congressional investigation of the affair took place after Medbery’s book had been published. Major government officials at the Treasury and the White House were implicated, tainting the Grant administration’s reputation to this day.

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