Financial intelligence resembles a gossip mill. Person X pays his bills, Person Y does not. Business managers have always decided who to pay fast or slow. Some suppliers are coddled while others are bullied. Negative information (paying slow, late or not at all), true or not, changes relationships with vendors and makes business more difficult. There was a growing need to keep information confidential and private.
Everyone acts as both a buyer and a seller. They want the truth when they issue credit, and a positive rating for themselves when they are purchasing. Businesses needed a source or reliable information. Wall Street began with a few businesses acting as credit reporting agencies.
As businesses expand, the issue of credit and cash-flow become greater. Even with a guarantee that your customer will pay you, you may need additional capital to ramp up capacity to service new orders. Growing businesses lack enough credit with vendors to offer credit to their clients, too. The era when someone like Robert Morris could use his expansive network of credit to build a fleet and a nation had come to a close. The 18th century was the merchant's world. Men like Rockefeller and Carnegie found themselves in credit pinches as they grew, as did all the merchants of the growing empire. Everyone wanted to sell, and everyone needed to get paid. Profit, not liberty, was the predominate discussion of the day. The Big History model had shifted from politics to economics.
Manufacturing has a ceaseless urgency which differs from the seasonal fluctuations of an agrarian economy. Industrialism introduces new cultural divides; blue and white collars. War follows trading routes, and the Civil War follows the same pattern. Trust was waning between the modern factory-driven North and the traditional agrarian South. Abolitionists never dropped the issue of liberty for all. They found an ally in the industrialists, who, like the sophists of two millennia earlier, opposed unpaid labor. They saw slavery as unfair competition. The 19 th century economy ran through a number of seizures, and people are looking for something or someone to blame. The number of self-employed dropped about 50% between 1776 and 1865. The myth of the rugged, self-sufficient individual was dead. There was a growing codependence on the federal financial system. In the North, slavery opposition combined both moral and economic issues, but the call for Southern secession added a new political issue to the mix. All the major organizations of Northern society could see a public good in war.
Wall Street transformed from a credit-reporting agency to a credit-providing agency. The ability to make money on money was well-known. Rather than tying money up in mortgages, a new form of property was being created: intellectual property. As Franklin wished, money would be lent to merchants and industrialists, which seemed to offer the same surety. His views resonate today, where lending is regarded as a public service. Too few are asking "Why is there so much debt?' Lending is characterized as helping businesses and individuals through difficult times, but the original goal was to finance the future. This later reason being the one most commonly promoted, from John Law to the current Chamber of Commerce and Small Business Administration. Investing is always promoted as win-win, even though it is obviously a gambling table where someone must lose. The seduction of unearned income gets wrapped in a dissonance where preying on others is seen as helping them.
The selling of joint stocks was the equivalent of a business taking a loan from a group of different individuals, rather than directly from a bank. Just as credit information on the business was used by a bank to assess if the loan was a good risk, the ability to be listed in the stock exchange was a mark of creditworthiness. Using the framework of a joint-stock company, risk was theoretically mitigated and depersonalized for the lender and the banks. In theory, like democracy, the many hands involved make the process safer for everyone. Risk was diluted, and "owners' can enter and exit their position without disruption to the business. In practice, neither the promise of democracy or of stocks have been realized. While centralization can yield tyranny, decentralization can yield multiple risks.
For a business, there are major differences between a bank loan and selling stocks. A bank loan is for a fixed amount, interest must be paid, and a payment schedule to reimburse the bank is initiated with the loan. None of these things occur with stocks. Selling stocks is an influx of free money for the business to spend. Going public is a cash windfall, and a huge temptation. There is no day of reckoning when the note becomes due, but everyday becomes a day of reckoning to keep the share price high, which is in the best interest of everyone who owns shares. Any criticism of the business must be tempered to protect the stock value, and nobody else really cares.
For the business founders, stocks are better than the difficult business of buying-low and selling-high. Issuing stocks are far more profitable than selling a product. If the stock rises, the stocks they withheld are worth more, and easily redeemable for more cash. If the share value falls, they incur no loss. The business can perpetually capitalize on the manipulation of stock value. The cash infusion gets used to bully vendors and competitors, which appears to make the business more profitable. Not surprisingly, those who sell stocks and are inside the company during the early stage can get very rich. If the business is profitable, it is a double win-win. The corporation can also adjust what it pays in dividends, if it pays dividends at all, for its own convenience. It is easy to see why there is a push to take a business public.
The investment banks benefit from a huge influx of money as deposits. Whether the stock value rises or falls has only a secondary effect for them. Bankers are going to hold all the free cash as it moves between buyers and sellers of stocks. Either way, they win. The greater the activity, the more fees they collect. Banking was lucrative before stocks. Now it was more so. The newly created value is used to make new loans.
The buyers of the stock assume that there will be other buyers of the stock, which will inflate their share value. As we saw in the Mississippi Company, it makes no difference if the actual business is profitable or not, the stock itself is a separate commodity issued by, but not directly controlled by, the business. Its value is based on the psychology of the stockholders, who use real money to engage in a make-believe trading world of stock certificates. This virtual world has accelerated with the advent of computers, but, it only needs imagination and the habit of culture to fuel it. Stocks are an extension of the belief that money is real, and not just a chit.
The stock markets has winners and losers. Those who create stocks are the winners. Those who buy stocks are the losers. Any rise in share value is mimicked in the inflationary spiral. Those who buy stocks see their money devalued, whereas those who create stocks have their invented paper revalued as money.
Generally, people are advised to purchase stock as a hedge against inflation and to plan for retirement. In reality, the stock market drives inflation. Selling stocks for profit, just as in a ponzi scheme, requires a new participant to play the game that will fund the gains of another participant. The issue of timing becomes critically important. The game is about anticipating changes to group psychology, not about marketplaces, society needs or businesses. It is just as easy to lose money as it is to make money. The late investors are at a perpetual disadvantage, unless they are purchasing after a collapse of share value, which belies the advice to invest. Of course, it is also critically important that the original business remain solvent, otherwise the entire scheme will collapse.
In the aftermath of the Civil War, many new banks were founded. They were primarily mutual, savers or cooperative banks, not commercial banks. In other words, they were formed with the noble purpose of helping the community. The goal was to provide a bridge between generations, and harness the wealth of the community for the social good. At the same time, many social and civic organizations were formed. There was clearly a desire on the part of many people to reduce the social and financial antecedents that led to the Civil War.
A new breed of bankers went into the countryside to convince farmers to take their money out from under the mattress, and instead deposit it in their banks. They were often shocked to discover the amount of hard currency that was being held on what appeared to be a ramshackle farm. In return, the bankers offered an interest payment on their deposit. Money would "grow' just like the crops on the farm.
The result was an economic boom, as all this new money flowed into the economy. Unfortunately for the farmers, they seeded their own destruction. The Roaring 20's arrived, and in its aftermath, the Great Depression, where many families lost the farm. More money and more interest creates more inflation. This is why the discovery of gold and silver on the new continents, rather than making the old empires rich, worked silently to destroy them. The same thing had occurred in America with the Gold Rush of 1849. More money does not solve the ancient economic problems, regardless of whether its form is gold, cash or stocks. The traditional practice of buy low-sell high does not work. More money creates bigger problems. With the rise of the banks and the stock market, more and more people were paying and receiving unearned income, putting themselves and the future at risk.
Earned and unearned income are two rails of the same track. Ben Franklin claimed that earned income is productive, whereas unearned income was destructive. Interest, and the dividends paid from a joint-stock company, are predatory mechanisms. For someone to earn money without labor, then someone must be laboring without pay. The stock market was an evolution of the original slave and serf systems. What goes around must come around.
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