Session 18: Financing consolidation and the “maturation” of the NYSE

1. The growth and modernization of the financial sector: transformation of Wall

St. from a RR bond to an industrial stock market.
• Gradual evolution; preferred stock as an intermediate step.
• “Common” stock revolution in the 1920s.

2. Economic-political context. Economic context emphasizes the great merger

movement
• Why so great? Reconfigured the industrial landscape, creating stable
oligopolies in 2nd IR sectors.
• The Great Depression of the 1890s and ruinous competition among new, 2nd
IR enterprises sparked an “urge (or propensity) to merge.”

3. Political-legal context: Consolidations also depended on political-legal

innovations: the Sherman Act of 1890 and 1895 Knight Decision.
• Sherman prohibited legally enforceable cartel agreements, while Knight
created a loophole that legalized consolidations for the same purpose.
• US Steel case study
• The 1911 Standard Oil case and rule of reason: “good” vs. bad trusts.

4. From GMM to the transformation of Wall St from a RR bond to an industrial

stock market beginning in the mid-1890s.
• A simple but crucial factor: before 1899, unusually high real holding returns
from RR bonds (rather than return to maturity). Why?
• After 1899, shifting prospects of bonds and stocks. Again, why? Impact of
the GMM? RR bankruptcies and court decisions?

5. One final note on what did the NYSE do?

 Millions of shares

0
50
100
150
200
250
300
18
79

18
81

18
83

18
85

18
87

18
89

18
91

18
93

18
95

18
97

18
99
NYSE Stock Transactions

19
01

19
03

19
05

19
07

19
09

19
11

19
13
Table 2 Sectoral Breakdown of Traded Stocks on the NYSE

1885 1890 1895 1900 1905 1910 1915 1920 1925 1930

Total 151 264 263 296 341 331 420 670 774 1,273
Railroads 122 194 160 161 168 146 146 150 131 151
(%) (81) (73) (61) (54) (49) (44) (35) (22) (17) (12)
Utilities 5 15 26 32 34 34 34 11 38 89

U.S. Stock Market Expansion, 1885–1930

(%) (3) (6) (10) (11) (10) (10) (8) (2) (5) (7)
Industrials 24 55 76 103 139 151 240 509 605 1,033
(%) (16) (21) (29) (35) (41) (46) (57) (76) (78) (81)
Coal & mining 11 20 19 18 22 30 36 44 29 25
(%) (7) (8) (7) (6) (6) (9) (9) (7) (4) (2)
Other 13 35 57 85 117 121 204 465 576 1,107
(%) (9) (13) (22) (29) (34) (37) (49) (69) (74) (87)

Source: Author’s analysis based on data from Manual of Statistics, Financial Review, The Annalist, Bank & Quotation Record.

499
 U.S. Stock Market Expansion, 1885–1930 495

Table 1 Number of Traded Stocks on Leading U.S. Exchanges in 1885

Sectors NYSE BSE PHLX

All sectors 151 249 79

Railroad 122 73 50
(%) (81) (29) (63)
Utilities 5 22 6
(%) (3) (8) (8)
Industrials & misc. 24 83 10
(%) (17) (33) (13)
Mining 11 10 0
(%) (7) (4) 0
Other industrials & misc. 13 73a 10
(%) (9) (29)a (13)
Finance, insurance & real estate 0 71 13
(%) (29) (16)

Source: NYSE: Financial Review, 1886; Boston Stock Exchange and Philadelphia Stock
Exchange: Manual of Statistics, 1886.
a Mainly auction sales with the exceptions of American Watch and Quincy Railroad Bridge.

in 1869 to set requirements for securities that could be listed on

the exchange.14 The conservatism of the NYSE’s listing requirements
precluded it from admitting issuers other than the largest and most
well-established companies and, at that time, such companies in the
United States tended to be railroads. As table 1 shows, 122 out of the
151 stocks traded on the NYSE in 1885 were railroad stocks. Most
of the remaining stocks on the NYSE in that year were the securities
of telephone and telegraph companies or mining companies. Only an
additional thirteen stocks could be classified as industrial and mis-
cellaneous companies and, of these, Pullman’s business, as well as
the activities of four express companies, was closely bound up with
the railroads.
New York was also the home to a number of other important
trading markets that competed with the Big Board for business. In
the mid-1880s, the growing importance of mining and industrial
securities which, for the most part, the NYSE deemed as highly
speculative, served as the foundation for an active outside or curb
market for these securities in the city as well as for the emergence
of the Consolidated Stock and Petroleum Exchange, NYSE’s most
formidable direct competitor since the Open Board.15
The Consolidated Exchange traded in mining stocks, petroleum
pipeline certificates, and ‘miscellaneous securities’, but in 1884 its

14. George Leffler, The Stock Market (New York, 1957), 101.
15. The NYSE dealt with the competitive threat presented by the Open Board
by merging with it in 1869.
766 Lance E. Davis and Robert J. Cull

Table 16.10. U.S. equity issues traded in December, various years

NYSE LSE

Rails Non-Rails Rails Non-Rails

# of # of # of # of
Firms Issues Firms Issues Firms Issues Firms Issues

1870 30 45 13 16 5 6 2 2
1880 63 81 30 31 14 19 20 25
1890 91 129 38 44 33 48 59 90
1900 80 133 65 96 31 53 61 92
1910 67 105 84 128 31 48 62 99

Sources: NYSE data comes from the New York Times, LSE data from the Investor’s Monthly
Manual.
Notes: Foreign (non-U.S.) firms that were traded on the New York Stock Exchange are
excluded from NYSE totals.
In some cases, it was not possible to identify a firm as rail or non-rail based on the infor-
mation provided in the Times. These firms are excluded from the NYSE totals. In no year
did unidentified firms account for more than 4 percent of total firms.
The Times data have been cross-referenced with Listings Statements New York Stock
Exchange. In a small percentage of cases, firms which appear in the Times listings were not
found in New York Exchange Printing Company, various years. These firms are, however,
included in the NYSE totals above.
Railroads that provided urban transportation services are included under rail issues.
Included among the equity issues for New York are all securities mentioned in the Times
listings except those listed in a section reserved for bonds. Equity issues include all types
of preferred shares, tradable rights, and tradable certificates.
The equity issues of investment companies that bought only railroad securities were
counted as rail issues.
New York City bank stocks appeared frequently in the 1870 Times listings, but in sub-
sequent years appeared rarely if at all. To facilitate consistent comparisons between 1870
and other years, we have chosen not to include bank stocks in the NYSE totals.

New York Central Railroad, the Illinois Central, and two issues of the Erie
Railroad were traded on both exchanges.
The increase in American stock listings from 1870 to 1880 suggests
rapid American economic expansion, and it is obvious that the financial
demands engendered by that expansion placed a severe strain on the
nation’s adolescent capital market. The number of firms whose shares
traded in December on the New York exchange more than doubled, while

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The Great Merger Movement

 
Standard Oil as the "Octopus"
 Number and Capitalization of Mergers

1400 $2,500

1200 Number

$2,000

Capital value of merged firms ($millions)

Capital

1000
Number of entities

$1,500
800

600
$1,000

400

$500
200

0 $0
 4-Firm concentration ratio

0
10
20
30
40
50
60
70
80
90
100
Food etc.

39.1
Tobacco

49.9
Textiles

20.3
Lumber-wood

0.5
Pulp, paper
71.0

Printing-publishing

1.0
Chemical
24.3

Petroleum, coal
46.8

Rubber
(in 2-Digit Industries)

100.0

Leather etc.
Industrial Concentration in 1901

26.3

Stone, clay, glass

13.3

Primary metals
45.7

Non-elec. Machinery
41.4

Transport.
57.3

equipment

Other manufacturers
2.7
Arthur C. Hastings of the Cliff Paper Company before
the House Pulp and Paper Investigation Committee

 Mr. Stafford: Then the manufacturers at the time [the 1890s] did not
shut down their mill, but continued to manufacture.
 Mr. Hastings: Very few of them that I know closed down. We did not.
We ran pretty steadily.

 Mr. Sims: You did not even curtail your time?

 Mr. Hastings: No, sir; because we could dispose of our product.

 Mr. Sims: At a loss?

 Mr. Hastings: At a loss. It was merely a question whether you ran along
and took care of your fixed charges and made a small loss on your
tonnage.

 U.S. Congress, House, Pulp and Paper Investigation Hearings, Vol. III, pp 1616-17
 Knight Decision (1895)

“That which belongs to commerce is within the jurisdiction of the United States, but that
which does not belong to commerce is within the jurisdiction of the police power of the
State [Government]. . . . Doubtless the power to control the manufacture of a given thing
involves in a certain sense the control of its disposition [sale], but . . . affects it only
incidentally and indirectly.”

Source: http://www.pbs.org/wnet/supremecourt/capitalism/landmark_knight.html
 Average Annual Inflation-Adjusted Total Holding Returns

Instrument 1872-1899 1900-1925

Return S.D. Return S.D.
Stock Index 8.14 14.41 6.90 18.69

Bonds
Government 5.68 3.79 -0.22 7.55
High-Grade RRs 8.27 3.94 1.38 9.41

Commercial Paper 6.68 2.60 2.00 6.28

Advertisement for Union Pacific “First Mortgage” 
Bonds, 1867
 Miles in Receivership

10000
15000
20000
25000
30000

5000

0
18
70
18
71
18
72
18
73
18
74
18
75
18
76
18
77
18
78
Mileage

18
79
% total Miles

18
80
18
81
18
82
18
83
18
84
18
85
18
86
18
87
18
Railroads in Receivership

88
18
89
18
90
18
91
18
92
18
93
18
94
18
95
18
96
18
97
0
2
4
6
8
10
12
14
16
18

% of Total Miles
 Cowles Index (1941-43=10)

0
5
10
15
20
25
30
35
40
45
18
71
18
73
18
75
18
77
18 RRs
79
DJIA
Utilities
18
81
Industrials
Composite

18
83
18
85
18
87
18
89
18
91
18
93
18
95
18
97
Stock Price Indices

18
99
19
01
19
03
19
05
19
07
19
09
19
11
19
13
0
20
40
60
80
100
120

Dow Jones Industrials

 Common Stock Price Dividend and
Railroad Bond Yields
12.0

Composite
Industrials
10.0 RRs
RR Bonds

8.0
Annual %

6.0

4.0

2.0

0.0
71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13
18

18

18

18

18

18

18

18

18

18

18

18

18

18

18

19

19

19

19

19

19

19
 Figure 1
Schematic Representation of Equity Receivership Proces
Courtappoints
RECEIVERto
runrailroad
rDefault: Investorsform REORGANIZATION ASSEN
>
DeCut PInvestors COMMITTEE Excha
Court PROTECTIVE
CMIdrafts Often
etitione ~
etitione COMMITTEES
COMMITTES EXCHANGEPROPOSAL /nvestors ASSES
choose between:
Exchange Ca-h
Courtsets : Proposaland
- CUPSETVALUE ---O- ~UPSET
VALUE~~ *\pset Value :
on existing securities
-- DISSEN
Cash Up
No long
*If the reorganization
proposalwas not broadlyaccepted, the reorganizationcommitteewould revise it and resubmitit
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