Before the Civil War, U.S. financial markets operated in a world far removed from today's fast-paced trading venues. Auctions were held only twice a day, and newspapers were the main source of transaction reports. From the advent of the railroad to the effects of the Panic of 1837, understanding the behavior of these early markets reveals the risks and opportunities that shaped the foundation of today's financial system.
This historical story reveals important lessons for modern analysts navigating an ever-changing landscape. This is the final installment of a three-part series (Part I, Part II).
go back to the past
Back before the Civil War, the stock market looked much different than it does today. Currency transactions were conducted, but there were no experts on-site, and there were no ongoing transactions. Rather, auctions were held twice a day. The names of listed stocks were called out in order. The announcer would stop and check to see if a bid, sell, or more than one was being called out, and if there was a match, it would be recorded in the ledger as a transaction.
During this era, most stocks were not traded every day. When the offers stopped shouting or there were no offers, the announcer continued the list to the next stock. In many cases, the bid and ask prices did not match in the auction. Instead, bids and offers serve only as a starting point, an anchor for setting expectations, with the actual trading taking place later on the street. These transactions may have been reported in newspapers, but were not found in NYSE records.
Fortunately, historical analysis, stock trading It was It was reported in the daily newspapers from the beginning. These sections were sometimes labeled “Stocks” but were always newsworthy. In fact, a few years ago a team led by Richard Shira at New York University was able to compile a vast archive of pre-Civil War newspaper price quotes. You might be surprised to learn how many stocks have trading records dating back to before the War of 1812. It wasn't until 1800 that the number of listed stocks dwindled to a mere handful.
New York was not a financial center
Another important difference is that the New York Stock Exchange achieved national dominance only after the 1840s. To properly cover the entire market capitalization, the stock index for this period should include stocks traded in Boston, Philadelphia, and Baltimore. In fact, at the beginning of this era, Philadelphia was the financial capital of the United States.
New York did not take the lead until the Panic of 1837, and its consolidation of a leading role was still underway at the beginning of the Civil War. Throughout the 1860s, there were competing exchanges in New York City itself and other cities. The true dominance of the New York Stock Exchange waited after the war, when railroads, telegraphs, and tickers united the nation.
New York's non-domination was not well understood until the work of Richard Sylla. Jeremy Siegel's landmark Stock Returns to 1802 compilation used only stocks listed in New York for most of the period before the Civil War. This is true for the Goetzmann, Ibbotson, and Peng dataset dating back to 1815.
I believe that using only New York-listed stocks introduces significant survivorship bias. There's a reason the New York Stock Exchange eventually achieved national dominance. Economic, political, and financial conditions were more favorable to the accumulation of wealth through investment in New York City than anywhere else. I found that Philadelphia and Baltimore had much lower stock returns and more failures and bankruptcies, which had the effect of significantly lowering the stock returns reported in my paper. Financial Analyst Journalcompared to what is reported in Jeremy Siegel's book, long term stocks.
Nevertheless, the U.S. stock market has existed since 1793, with multiple stocks listed and traded, and a good historical record. For stocks, this period can be divided into two, with the Panic of 1837 as the hinge.
From 1793 to the Panic of 1837
As of January 1793, it was possible to find one bank each trading in New York, Boston, and Philadelphia.cent Bank of United States (traded on all exchanges). Each contains a price record and information about the number of shares and dividends. The Sylla database has quotes from before 1793, including during the first market panic in 1792, but we were unable to extract reliable price and dividend records before January 1793. .
For the first decades, almost all of the stock market capitalization was made up of commercial banks. There were no other trading departments. By the War of 1812, several insurance companies and a small number of turnpike stocks had emerged, but banks remained dominant. After the war, the proliferation of marine and fire insurance companies, especially in New York, meant that for the first time the market contained two roughly equally weighted sectors. Or, if banking stocks and insurance stocks are lumped together, there could be only one sector: the financial sector. The total market capitalization of the financial services sector significantly exceeded the small number of transportation and manufacturing stocks that traded before 1830.
Railroad stocks began trading in New York in 1830 and soon dominated trading volume. Even a small railroad would require capital on the same scale as a large bank. With the onset of the Panic of 1837, the railroad's total ceiling approached that of the insurance sector. By 1843, after the collapse of many banks and insurance companies, and the end of the Great Depression, the market capitalization of the still expanding railroad sector was almost equal to that of the entire traded financial sector.
By the end of the period, banks and insurance companies had moved off the exchange. From 1845 until near the end of the century, the U.S. stock market, valued in terms of market capitalization and focused on the NYSE, became almost entirely a market for railroad stocks.
From the Panic of 1837 to the Civil War
The railroad sector continued to expand until bankruptcy in the fall of 1857. This was a severe but very short stock market crash similar to October 1987. Although it was confirmed in the monthly index, it was hardly confirmed in the annual record. Although stronger railroads recovered, the value of weak roads continued to decline through the outbreak of the Civil War.
Stocks that sold for $100 a few years ago were trading in the single digits at their lowest point. Dividend suspensions were widespread. My index, which measures the real total return of stocks over 20- and 30-year periods, reaches a generational low in the late 1850s.
The Civil War caused the value of Northern railroad stocks to soar. Generous dividends of 8% to 10% were soon resumed as profits exploded to meet the demands of wartime mobilization. Most of the southern railroads, which were barely traded on the major northern stock exchanges, were destroyed. Analysts should be aware that the historical record for the 1860s, as currently compiled, includes only the stocks of the victorious Union. A sizable number of bank and railroad stocks based in Confederate states, which went mostly to zero during the war, are not included in the historical record of U.S. stock market returns.
bond
Alexander Hamilton's repayment of the Revolutionary War debt in the early 1790s created the U.S. Treasury market. For comparison with stocks, we have data on Treasury revenues from January 1793.
But the bond market record is once again more complex than the stock market record. For example, Hamilton's bonds do not have a stated maturity date, so the yield to maturity cannot be calculated.
Most notably, in early 1835, President Andrew Jackson paid off the remaining U.S. debt. There were no long-term government bonds (or “reserve bonds'' in the parlance of the time) that could be purchased until late 1842.
Starting with Sidney Homer History of interest ratesand continuing the work of Jeremy Siegel, the temporary disappearance of the Treasury has been handled by substituting other types of national, state, or municipal bonds. From the late 1820s, the Sila Archives have records from 12 municipal publishers.
Unfortunately, during the panic that followed the Panic of 1837, several states defaulted on their debts, making “treasury bonds” a suitable substitute and foil for risk-free, or at least non-default, financial instruments. It made a mockery of the idea that there was such a thing. To assess stock risk.
Before the Depression, it was impossible to distinguish between issuers that ultimately defaulted (such as Pennsylvania and Maryland) and those that weathered the recession without incident (such as Boston and Philadelphia).
Historians who need equity evidence can use hindsight to select municipal issuers that have not defaulted. But investors at the time didn't like that kind of hindsight, and all explanations of “equity risk” were false. Simply put, it is questionable whether government bonds were less risky than stocks throughout this early period.
Finally, the corporate bond market did not emerge until just before the Civil War. It exploded onto the scene in the mid-1850s. By the end of the Civil War, the corporate bond market had achieved almost modern contours, with individual bonds priced according to their perceived credit quality and periodic new issues. Two caveats: Most of the corporate bonds were from a single sector: railroads. Additionally, the shortest maturity bonds issued are typically 10 years, with 20- and 30-year bonds being common until the 1880s, when 40-, 50-, and 100-year bonds began to proliferate.
Important points
We hope you've taken some inspiration from this series that explores 230 years of U.S. market history. There are several things to keep in mind when reading other historical accounts.
- The Civil War was an important turning point for stocks. After that, this has probably been a continuous market record to this day. Previously, the stock market looked very different.
- In the case of bonds, World War I marks the dividing line between what is essentially a modern government bond market and something entirely different. Remember, before 1913 there was no Federal Reserve System. Rather, two attempts to establish a central bank in the United States failed.cent and 2n.d. One U.S. bank was closed by executive order in 1811, and the other was destroyed by executive order in the 1830s.
- From a second-century perspective, there is no reason to think that the stock and bond returns of recent decades will generalize across the record. Because the structure and composition of markets are so different, the returns for stocks and bonds could be very different in another few decades.
- The purpose of past research is not to obtain larger sample sizes to more accurately estimate average expected returns. Rather, the purpose is to understand how things were different in the past and to better understand the range of possibilities for the future.
source of information
- A spreadsheet containing Richard Sylla data can be downloaded from EH.net. [https://eh.net/database/early-u-s-securities-prices/]. These are prices only, but include stocks as well as bonds.
- In the online appendix to my paper at FAJ, you can find a guide to Sylla and other historical compilations, as well as my book, where you can find the individual stocks I used (selected from stocks with excellent records in Sylla). Contains both links to detailed spreadsheets. Share counts and dividends are also shown (the latter two are not included in Sylla).
- Investment Analyst's Guide: Working with Historical Market Data
- A guide for investment analysts: Toward a long-term view of U.S. financial markets
