The Past Speaks

Mary A. O’Sullivan, Dividends of Development: Securities Markets in the History of U.S. Capitalism, 1866-1922. New York: Oxford University Press, 2016. xvii + 384 pp. $90 (hardback), ISBN: 978-0-19-958444-4.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.
Mary Sullivan provides a marvelous narrative covering the development of U.S. securities markets between 1866 and 1922. A major point of the book is that by looking at the historical development of U.S. securities markets through a modern, theoretical lens — one emphasizing risk sharing and the efficient allocation of financial capital — one misses much of the interplay between the productive and financial sectors in U.S. economic development. She argues that up until World War I railroad stocks dominated trading on the New York Stock Exchange in markets that were much deeper and more liquid than those for industrial stocks. One reason for this was that most industrial concerns could finance out of retained earnings, with equity issues being used more for consolidations and mergers, not long-term capital investments. This was in sharp contrast to the London Stock Exchange, where industrial securities traded widely. The dominance of railroad securities is not all that puzzling, given the immense expansion of the U.S. rail network as the country and agriculture expanded westward.

Sullivan presents her story with an enjoyable set of tables and graphs mixed together with detailed case studies and highly focused analyses of specific historical episodes. While the narrative is dense and heavily referenced, it nevertheless holds the reader’s attention. Chapter one is an extended survey of the development of U.S. securities markets. In it she argues that markets advanced in fits and starts in contrast to a more Whiggish view of the evolution of securities markets. Chapter two examines the attempts to get American brewing stocks listed on the London Stock Exchange. The volatility of the brewing stocks, not the failure of promoters or the London Stock Exchange, appears to have been the reason that they did not find a market in the U.K. This bred a further lack of interest in other American industrial stocks being promoted in the U.K. Chapter three discusses how poorly developed accounting practices and low standards for access to the New York Stock Exchange hindered the demand for industrial securities in the U.S. Chapter four begins the analysis of the role of the call loan market in the market for industrial securities around the turn of the century, and action in the call loan market becomes an important sub-plot for the remainder of the book. Chapter five highlights the role of mining stocks, particularly those of copper concerns, in fomenting the panic of 1907. It also restates the destabilizing role of the call loan market on the stock market. Chapters six and seven cover the reaction of Wall Street to the Panic of 1907 and the rise of proposals for a formal lender of last resort, culminating in the Aldrich Plan and the Federal Reserve Act. They also review the findings of the Pujo Committee’s investigation into the “money trust” on Wall Street, and O’Sullivan concludes that J.P. Morgan and his colleagues had much less control over credit than has been popularly believed. Chapter eight discusses how World War I dramatically altered U.S. markets for industrial securities, making them deep and liquid.

Her main conclusion is that the development U.S. securities markets in the later nineteenth century had not matched that of the productive sector. In particular, it was the nature of the growth in the productive sector that affected how financial markets evolved. Certainly, the dominance of railroad securities affected the development of financial markets. But the structure of the banking industry in the U.S. was also unique in comparison to Europe, and it could be argued that it was not as advanced as in Europe as well. Paul Warburg knew this, James Stillman’s protests notwithstanding. The U.S. had unit banking on top of a dual banking system, as Eugene White has carefully documented. There was also no formal lender of last resort, and a good deal of the later part of the book examines the roles of the National Monetary Commission and the Pujo Committee hearings in the push towards what became the Federal Reserve System. Furthermore, there was no significant secondary market for commercial paper in the U.S., an issue that came up regularly in the debates over currency reform. These independent topics are discussed accurately and at some length in the book, but I am not quite sure how they then relate to the issue of the development of securities markets in the U.S. Nevertheless, O’Sullivan’s depiction of the U.S. securities markets developing in fits and starts seems quite accurate.

The call loan market gets a lot of coverage in the book, and it should because the infamous pyramiding of reserves under National Banking tended to accumulate reserves in New York national banks. Without an active secondary market in commercial paper, the call loan market was about the only liquid outlet for these reserves that were needed to be available to banks on short term notice. The Panic of 1907 revealed the peril of inadvertently linking the payments system to capital markets through call loans. But what could have been an alternative to the call loan market in the U.S.? Perhaps more comparison with British and European financial markets would clarify this issue. Even with the advent of the Federal Reserve System, the call loan market did not go away. And it reappeared with a vengeance in October, 1929.

Dividends of Development is an important addition to the literature on securities markets and to the development of financial markets in general in the U.S. I view it as a useful guide for further research.
Jon Moen is Chair and Associate Professor in the Economics Department at the University of Mississippi. He has studied the Bank Panic of 1907 and its role in the founding of the Federal Reserve System. He currently is examining the limited role of the New York Clearing House as a lender of last during the National Banking Era.