Excavating Finance’s Past

In the Panic of 1907, J.P. Morgan Sr. rallied bankers to stem the financial chaos. Nobody else, including President Theodore Roosevelt, seemed up to the task. Seeing so much power in one private financier’s hands then spurred politicians to create the Federal Reserve System. But personalities matter in both the public and private sectors. New York Fed Governor Benjamin Strong, who might have been a reassuring figure during the 1929 Crash, unfortunately had died the year before.

There doesn’t seem to be any iron law that determined that hedge funds would appear in financial history in the years after World War II. Rather, that reflected the personal creativity and initiative of Alfred Winslow Jones. In 1970, Robert Haack, renegade president of the New York Stock Exchange, defied powerful players on Wall Street and his own institution by calling for an end to fixed commissions, giving the industry a major push toward the great unfixing of May Day 1975.

For decades, academic financial theory, built on the efficient-markets hypothesis, emphasized the abstract and mathematical. But finance is an activity conducted by people. On a theoretical level, behavioral finance has been important in taking account of human idiosyncrasy. On a practical level, a financial advisor who thinks of the job as number-crunching for cookie-cutter clients is bound to fail. History suggests you can’t ignore personalities — whether you’re assessing your clients’ needs, your partnership prospects or how much confidence you have in a Treasury secretary or wirehouse CEO.

4. Financial innovation is crucial.

In the wake of the Great Meltdown, financial innovation is viewed with great suspicion. Some innovations turned out to be duds, or at least to have problems and exposures that were poorly disclosed and understood. The auction-rate securities market is effectively dead, for example, and few would argue these days that its benefits justified its risks.

The history of financial innovation, however, is not some one-sided litany of duds and debacles. Rather, many products and techniques that were cutting-edge for their time have done much good. One wonders, for instance, how companies would have coped with floating exchange rates without the currency futures pioneered by Leo Melamed at the Chicago Mercantile Exchange in the 1970s with inspiration from Milton Friedman.

Or consider how G. Keith Funston, the New York Stock Exchange’s president in the 1950s, set up innovative installment plans to get people back in the stock market and build up “people’s capitalism” a quarter century after the Great Crash? Would it have been better if Wall Street had accepted risk aversion and capital scarcity as post-World War II America’s inevitable “new normal”? Clearly, the answer to that question is no.

As an advisor, you have the critical task of sorting through financial innovations on behalf of your clients, to determine which products and techniques are suitable and recommend them accordingly. You also may need to help clients understand that there is little choice but to innovate, since the strategies of the past are not necessarily the ones that make sense going forward.

5. Your job will keep changing.

The system of fixed commissions that began with the 1792 Buttonwood Agreement and ended with the 1975 May Day reform had the effect of limiting competition in the brokerage industry. Even so, stock brokers never really had much assurance of a placid or predictable career. Things could be shaken up by crises and new technologies. If you’d started working about a century and a half ago, you’d have been buffeted by the Panic of 1857 and the advent of ticker machines in 1867, not to mention the Civil War in between.

In the past three and one-half decades, competitive pressures, plus technological advances and financial turbulence, have transformed the industry. “Brokers” have become “advisors,” with new pay arrangements and broadened missions. Business has been dispersed geographically such that the term “Wall Street” is becoming anachronistic too. The clubby, insular atmosphere of the brokerage industry of yore has few vestiges.

There is little reason to think this period of heightened change is over. On the contrary, emerging developments — a tighter regulatory regime, the baby boomers entering retirement, the federal government facing vast fiscal pressures — all point toward advisors needing to rethink and retrain on an ongoing basis. A key lesson of history is that your job is going to keep changing, and you’ll have to be nimble to thrive.

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Some Noted Scholars
Looking to delve further into financial history? Here are a few experts whose works you should check out:

• Ron Chernow, biographer, is the author of books including Alexander Hamilton: A Life and The House of Morgan.
• Niall Ferguson, history professor at Harvard, wrote The Ascent of Money: A Financial History of the World, a book that served as the basis for a PBS documentary. His most recent book is High Financier: the Lives and Time of Siegmund Warburg.
• John Steele Gordon’s books include An Empire of Wealth: The Epic History of American Economic Power and Hamilton’s Blessing: The Extraordinary Times of Our National Debt.
• William L. Silber, professor at NYU’s Stern School of Business (and not related to this article’s author), wrote When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.
• Richard Sylla, also of NYU’s Stern School, has written widely on financial history. He serves as vice chair of the Museum of American Finance, located in lower Manhattan.