The Buttonwood Agreement | Framework For The New York Stock Exchange

Part of the United States finding its way early in its history was the organization of its financial systems. A key part in that early ordering was the founding of the New York Stock Exchange in 1792, when 24 of New York City’s top merchants met secretly at a hotel to figure out how to regulate the securities business in an attempt to gain control of it from the auctioneers.

The concept of a stock market was not unfamiliar to these men. The first stock in history was issued in 1606, in a period when the Netherlands and Portugal established trading as part of their seafaring empires. Other countries that traveled widely by ship and began to trade followed suit, including Spain, England, and then, America.

Alexander Hamilton, the first U.S. Secretary of the Treasury, had studied the British stock market and advocated a similar organization in the U.S. to build a strong economy. His statue stands in New York City’s financial district, a tribute to his tireless advocacy for a stock market during his term from 1789-1795.

The document that founded the NYSE is called the Buttonwood Agreement, named after the usual meeting place of the merchants, underneath a Buttonwood tree on Wall Street. The men who signed the document agreed to trade securities only among themselves, to establish trading fees and to abstain from the auctions of other securities not in their domain. At the time, just five securities were being traded in the city, three of them government bonds that had been created to pay for the Revolutionary War; the other two were bank stocks (Bank of America listed first).

Per the Buttonwood Agreement, the government bonds had promised to pay out a profit to those who helped to erase the war debt by forking over a portion of the $80 million raised in 1790. Banks got into the act at about the same time, issuing stocks to raise money, quite an evolution from the early stock markets in Europe, which centered on the shipping and spice markets.

The gentlemen who founded the NYSE settled in a building on Wall Street, so named because the Dutch had built a wall along it to protect themselves from Indians and pirates a century before. Wall Street housed several warehouses and shops, along with city hall and a church. When New York was the capitol of the States from 1785-90, Federal Hall was also erected on Wall Street, and George Washington was inaugurated there.

The NYSE grew a bit over the next few decades, then became even more organized in 1817 by establishing a constitution with rules and regulations, along with a formal name: the New York Stock and Exchange Board. The name was shortened to its current moniker in 1863. By 1886, the NYSE was trading one million shares per day.

In its early days, the NYSE operated like this: the president would read the stocks to be traded to all of the members, each of whom had been voted in and escaped a black-ball of three negative votes, enough to eliminate their bid to participate in the organization. In 1817, a place on the exchange cost $25; that rose to $100 ten years later, then to $400 in 1848. Members looked the part of the rulers of a financial system, sporting top hats and swallowtail coats while doing business.

Businesses saw how advantageous it was to raise money by selling stocks, and they barged into the NYSE in the mid-1800s. Their participation has grown to the tune of a market capitalization nearing $15 trillion total in 2012. On any given day, billions of dollars worth of shares are traded, a long way from the smaller sums that two dozen men exchanged near prior to the Buttonwood Agreement.

The NYSE building at 18 Broad Street, with its giant trading floor and skylight built into its 72’ ceiling, scarcely resembles the rented room that the 24 men used to meet in to trade in 1792. Yet, were it not for the vision of those 24, Alexander Hamilton and others, there is no way that the NYSE could have traveled its sometimes-rocky road to become the largest (by far) such exchange in the world.