The Buttonwood Agreement: Origins of Wall Street
The Buttonwood Agreement, signed in 1792, was a pivotal moment in the history of American finance. It marked the beginning of an organized stock exchange and laid the foundation for what we now know as Wall Street. This article explores the origins, significance, and key provisions of this historic agreement.
The Buttonwood Agreement emerged in response to the Financial Panic of 1792. This crisis was triggered by reckless lending practices by the Bank of the United States and speculative attempts to manipulate the debt securities market, resulting in defaults on loans, bank runs, and panic selling of securities.
On May 17, 1792, 24 prominent merchants and brokers from the New York business and financial community convened at 68 Wall Street. They assembled under the shade of a buttonwood tree, where they had been discussing a written agreement since March. Their goal was to restore trust in the marketplace and protect investors' interests.
Buttonwood Agreement Formation
At this gathering, these individuals established a club-like organization. They agreed to conduct trades exclusively among themselves, shutting out external agents and auctioneers who had previously conducted bond auctions and stock trades. This exclusivity aimed to ensure trust, honor payments, and maintain the legitimacy of investments.
One of the key provisions of the Buttonwood Agreement was the regulation of commissions. Brokers pledged to charge clients a fixed commission rate of 0.25% per transaction. This commitment aimed to prevent cutthroat competition over commission rates and ensure that prices reflected the actual value of stocks.
The Buttonwood Agreement was concise, consisting of only two sentences with two provisions. The exact text read:
"We the Subscribers, Brokers for the Purchase and Sale of Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter per cent Commission on the Specie value and that we will give a preference to each other in our Negotiations. In Testimony whereof we have set our hands this 17th day of May at New York. 1792."
Birth of the New York Stock Exchange
The Buttonwood Agreement laid the groundwork for what would eventually become the New York Stock Exchange (NYSE). While the NYSE would not receive formal organization and a constitution for another 25 years, this agreement established the principles of a members-only financial marketplace.
Evolution and Expansion
As the U.S. and its financial system grew, the initial gathering under buttonwood trees became impractical. In 1793, the participants moved their operations to the Tontine Coffee House. In 1817, the group evolved into the New York Stock and Exchange Board, reflecting New York's ascent as the nation's financial center. Finally, in 1863, it adopted the name "New York Stock Exchange," which remains unchanged to this day.
End of Fixed Commissions
The fixed commissions introduced by the Buttonwood Agreement remained a feature of the Wall Street financial market until 1975. At that time, the Securities and Exchange Commission (SEC) abolished them, marking a significant shift in the industry's pricing structure.
The Buttonwood Agreement, born out of the Financial Panic of 1792, was a pivotal moment in the history of American finance. It laid the foundation for the New York Stock Exchange and established principles of trust, exclusivity, and fair pricing that continue to shape the world of finance today. The 24 signatories, gathering under a buttonwood tree, set in motion a legacy that would become synonymous with Wall Street and American capitalism.