On May 17, 1792, two dozen New Yorkers met under a tree to talk about Revolutionary War debt. That little conversation spawned the behemoth we have all come to fear and loathe, yet depend on for tax revenue and retirement stability: the New York Stock Exchange.
After suffering the indignity of British occupation during the Revolutionary War, New York was on the upswing in the 1780s. On its way to passing Philadelphia as the largest city in the new United States, New York became the nation’s capitol in 1785, and George Washington was inaugurated here in 1789.
The young government faced two thorny questions: where would the nation’s permanent capital be located, and what would become of war debts from the Revolution? Though seemingly disparate issues, frenemies Thomas Jefferson and Alexander Hamilton worked out a compromise on a Manhattan sidewalk outside of Washington’s house. Jefferson wanted the capital in the south, preferably on the Potomac River, and Hamilton wanted federal assumption of war debts to create a strong central government. In 1790, construction began on Washington D.C, the capitol was temporarily moved to Philadelphia, and the federal government was now the proud owner of state war debt.
To pay off these debts, Congress issued $80,000 worth of government stocks, but the investor class’s appetite was tepid. Potential buyers were concerned about unloading the stocks down the road and fluctuating prices. Traders met informally in coffee shops and law offices, but there was no method to the madness. That’s why on May 17, 1792, 24 merchants got together under a buttonwood tree at 68 Wall Street to draw up plans for a New York Stock Exchange, a meeting forever known as the Buttonwood Agreement. Of the signatories, the name Bleecker might ring a bell – one of New York’s wealthiest families, two of them signed the agreement, and years later one of their relatives deeded today’s Bleecker Street to the city from the family farm
NYSE would be the fifth stock exchange in the world, following Antwerp, London, Paris, and rival Philadelphia, which founded its stock exchange two years earlier. (New York’s immediately became the more important of the two.) The main outlines of the agreement were that members of the Exchange would only trade with each other, and commission’s would be set at .25%, bringing stability to the trading of securities, most of which were Revolutionary War debts. Stock values were set according to eights (i.e. 34 3/8) according to prevailing method in Europe, itself following the Spanish standard for dividing silver dollars by eights. In 1817 the traders drew up a constitution for the New York Stock & Exchange Board.
Obviously, all kinds banking and insurance securities were to come as New York grew in commercial importance. This was just in time for the building of the Erie Canal, the bonds of which drove Wall Street to new heights. Through all of the panics, recessions and depressions, NYSE remains the most important and most capitalized stock exchange in the world. In 2007 it merged with Euronext to become a global entity.
From 1905 to 1981, New York levied a “stock transfer tax.” The tax, usually a few pennies per transaction, was phased out by Governor Carey in 1978 to coax the financial sector to stay in New York during the Bad Days, but Mayor Koch called for its restoration as early as 1982. Interestingly, the tax still exists in law, it just isn’t collected. It’s now been moribund for so long that only liberal economic groups still push for it, and if you scour their candidate questionnaires, you’ll probably find plenty of elected officials who called for it in desperate attempts to win endorsements.
For years, NYSE, like many corporate entities, has threatened to move to New Jersey if it doesn’t receive large subsidies from the city, such as the $600 million subsidy it received to update its headquarters in 1998. This is a high stakes game of chicken – no mayor or governor wants to be the one who lost Wall Street to New Jersey, even if it seems dubious that NYSE would follow through on such a threat.
New York’s desire to keep the financial industry here doesn’t just have to do with pride or tradition. The financial industry is responsible for as much as 20% of the city’s tax revenue, a number that dipped to as low as 13% during the Great Recession. (Which, let us remember, was caused by the financial sector.) Even though New York took a big hit at the beginning of the recession, like the rest of the country, Comptroller Tom Dinapoli credited the booming financial sector for speeding New York’s comeback. Anyone denouncing New York’s reliance on Wall Street would have to come up with powerful ideas in support of new industries that could weather the loss of those tax dollars.