We will all remember the 20th century as a century of chaos and revolution, and this is also true for financial trading.
This is the century that saw the foundation of the Federal Reserve, stock investment becoming a mass-culture pursuit, the Great Depression, the introduction of the Bretton Woods system, the arrival of derivatives, and of course electronic trading.
As you may remember from Part 1 of our series, the history of trading is majorly influenced by the formation of bubbles. By the late 19th century, these bubbles were becoming somewhat of a plague. The investing class was still mainly made up of elites who were likely to move in the same social circles and therefore tended to invest in the same direction based on word of mouth. Thus, bubbles were blowing up and going bust all over the place, and investment capital was vanishing into thin air.
By the arrival of the 20th century, it was clear to everyone that something had to change.
Here comes the Fed
In 1912, US Congress said “no more” to the ongoing financial chaos, and installed the Pujo Committee to investigate practices in the banking and securities industries in order to figure out a way to stabilize the financial sector.
After filing a report indicating that the majority of US finances was controlled by just three financial empires, among them J.P. Morgan (to this day!), the Pujo Committee was authorized to establish the House Committee on Banking and Currencies, now known as the House Committee on Financial Services.
In 1913, this committee founded the Federal Reserve System as a means of providing liquidity and credit in times of financial panic.
Everybody can own stock now
As America headed into the roaring twenties, the economy was booming after The Great War, and modern technologies were making it easier than ever to communicate urgent financial information. This is when financial firms started advertising stock investment not just to millionaires, but to the common folk. An estimated 500,000 to 2 million Americans owned stock before the First World War. This number had jumped to an estimated 10 to 20 million by 1929.
However, these new investors were easy prey for experienced brokers who were setting them up using brokerage pools, which were still legal back then. In a brokerage pool, brokers cooperated and bought a large portion of one company’s stock. Then they sold the stocks to one another which increased trading volume and made the stock look interesting to the unsuspecting investor. The stock price would then collapse due to being largely overvalued.
These brokerage pools were one of the factors that destabilized the market, and finally led to the famous Wall Street crash of October 1929: Black Thursday, followed by Black Monday and Black Tuesday.
The crash of 1929 served as a terrible but valuable lesson to 20th century economists. Much of their efforts throughout the consequent decades were dedicated to making stock and Commodity markets safer and more standardized in order to avoid a repeat of this major crisis. The US established the Securities and Exchange Commission on October 1st, 1934, in the purpose of regulating stocks, bonds, and other investment instruments.
In the meantime, let us know what you thought of this article by posting a comment below!
This is the century that saw the foundation of the Federal Reserve, stock investment becoming a mass-culture pursuit, the Great Depression, the introduction of the Bretton Woods system, the arrival of derivatives, and of course electronic trading.
As you may remember from Part 1 of our series, the history of trading is majorly influenced by the formation of bubbles. By the late 19th century, these bubbles were becoming somewhat of a plague. The investing class was still mainly made up of elites who were likely to move in the same social circles and therefore tended to invest in the same direction based on word of mouth. Thus, bubbles were blowing up and going bust all over the place, and investment capital was vanishing into thin air.
By the arrival of the 20th century, it was clear to everyone that something had to change.
Here comes the Fed
In 1912, US Congress said “no more” to the ongoing financial chaos, and installed the Pujo Committee to investigate practices in the banking and securities industries in order to figure out a way to stabilize the financial sector.
After filing a report indicating that the majority of US finances was controlled by just three financial empires, among them J.P. Morgan (to this day!), the Pujo Committee was authorized to establish the House Committee on Banking and Currencies, now known as the House Committee on Financial Services.
In 1913, this committee founded the Federal Reserve System as a means of providing liquidity and credit in times of financial panic.
Everybody can own stock now
As America headed into the roaring twenties, the economy was booming after The Great War, and modern technologies were making it easier than ever to communicate urgent financial information. This is when financial firms started advertising stock investment not just to millionaires, but to the common folk. An estimated 500,000 to 2 million Americans owned stock before the First World War. This number had jumped to an estimated 10 to 20 million by 1929.
However, these new investors were easy prey for experienced brokers who were setting them up using brokerage pools, which were still legal back then. In a brokerage pool, brokers cooperated and bought a large portion of one company’s stock. Then they sold the stocks to one another which increased trading volume and made the stock look interesting to the unsuspecting investor. The stock price would then collapse due to being largely overvalued.
These brokerage pools were one of the factors that destabilized the market, and finally led to the famous Wall Street crash of October 1929: Black Thursday, followed by Black Monday and Black Tuesday.
The crash of 1929 served as a terrible but valuable lesson to 20th century economists. Much of their efforts throughout the consequent decades were dedicated to making stock and Commodity markets safer and more standardized in order to avoid a repeat of this major crisis. The US established the Securities and Exchange Commission on October 1st, 1934, in the purpose of regulating stocks, bonds, and other investment instruments.
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Join us next week when we will discuss the latter part of the 20th
century, including the foundation of the modern foreign exchange, Commodities and Indices markets, as well as derivatives and electronic trading. In the meantime, let us know what you thought of this article by posting a comment below!
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