The Ascent of Money by Niall Ferguson

The Ascent of Money by Niall Ferguson

Human Bondage

A stock market is a market for the trade of securities and other financial instruments. Like a market in books, transcription services, or labor, a stock market need not have a geographic reference, and it can be more or less fragmented into autonomous markets. More abstractly, the term stock market refers to aggregate supply and aggregate demand forces for securities. The supply of such securities is generally fixed, although new securities are issued from time to time by extant and new public and private corporate organizations (Niall, 2009). The principal actors in stock markets are investors (representing themselves or clients), brokers (who act as intermediaries between investors and the exchange and who may, on some exchanges, trade for themselves as well as their clients), and regulators (who, depending on the exchange, may be either the brokers themselves or quasi-public or public bodies) (Abolafia, 1996).

A wide variety of institutionalist scholars have made the reasonable argument that economic markets require certain legal, social, political, or cultural institutions in order to function. For example, the Nobel Prize-winning economic historian Douglass C. North has argued throughout his career that what distinguishes European and American economies from those in the developing world are the superior economic institutions in the former. Such institutions can be formal (for instance, legal property rights or government economic policies) or informal (for instance, norms, culture, or ideology).

The Early Stock Market

The early U.S. stock market was geographically fragmented and operated without the benefits of exchanges or security-specific legislation. Today, the term broker is narrowly defined in securities markets as one who specializes in the purchase and sale of securities, but the word had a far broader meaning in the late 1700s. Brokers in the early Republic were generalist middlemen who brought together buyers and sellers and profited from a transaction's commission. It was common for brokers to not only buy and sell securities but also insure cargo, run a private lottery, and act as business partners in private banks, issuing their own notes to be used as currency. With the exception of shipbuilding and pig-iron production, there was practically no manufacturing at that time, so most businesspeople were, in fact, brokers (Niall, 2009).

The early national stock market was an ad hoc and transient creation of brokers who facilitated the trading of securities from their ...