Dispersed Capital and Moral Authority: The Paradox of Success in the Unregulated 19th Century New York Capital Markets

Abstract

In this age of Enron and WorldCom it may be hard to fathom the notion of successful, robust capital markets without extensive government regulation. Yet the 19th century New York capital markets offer a striking picture of success despite the aura of Robber Baron buccaneering.

This article will describe how the New York markets fostered the growth of great enterprises - first the railroads and then the supporting cast of gigantic industrials - by breaking the investment into tiny bits - shares that sanctioned the infusion of massive amounts of domestic and European capital. Security came from the liquidity provided, thus overcoming the hold-up effect present in smaller, family-controlled corporations or partnerships.

This article also addresses the riotous nature of the mid-century markets and their manipulation by unscrupulous investors such as the early Jay Gould and Daniel Drew. It shows how the moral authority of great investment bankers like Morgan, reputable brokers, and the New York Stock Exchange (NYSE) exerted their considerable influence to render the markets relatively transparent and safe for domestic and foreign capital, despite the climate of legislative and judicial corruption: an interesting model for modern minds to ponder.

Keywords: Dispersed ownership, emerging markets, Wall Street, Robber Barons

JEL Classification: G30, G38, K22, N21, N81