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Published by EH.NET (August 2003)

Howard M. Wachtel, Street of Dreams, Boulevard of Broken Hearts: Wall Street’s First Century. London and Sterling, VA: Pluto Press, 2003. xv + 239 pp. $25 (hardcover), ISBN: 0-7453-1925-4.

Reviewed for EH.NET by Edwin Perkins, University of Southern California.

This book, to put it as impolitely as possible, is comparable to a junk bond, an old junk too, since most of the endnotes cite books that had grown stale decades ago. A professor of economics at American University, Howard Wachtel makes little use of journal articles published in the Journal of Economic History, Explorations in Economic History, or the Business History Review — just a handful. As far as I could determine, he did not draw on the recent, earth-shaking scholarship of Richard Sylla, Peter Rousseau, and their collaborators on the crucial importance of the emerging U.S. capital markets in the early national period. Wachtel cites my book on the period from 1700 to 1815 in his bibliography, but he likewise made little use of it. Robert Wright has a new book on the contributions of early capital markets to the growth of the U.S. economy, but, in fairness, it was probably published too recently for the author to benefit from its wisdom. Unfortunately, Wachtel has little background as a business and/or financial historian, and it shows.

In case anyone has not heard the news, highly-respected financial historians have been arguing that the spectacular success of the U.S. economy in the first half of the nineteenth century can be explained, in large part, by the outstanding performance of financial markets, including the vibrant capital market. Some have even asserted that the U.S. financial markets were in numerous ways superior to those in Great Britain. British securities were overwhelmingly bonds, whereas the American markets boasted a wide range of equities

The narrative covers events on Wall Street from the late eighteenth century through the early twentieth. Rather than offering a balanced analysis, the author’s main focus is on scandals, which are enhanced with sidebars and pejorative human-interest stories. He rakes over the coals the likes of J.P. Morgan, Daniel Drew, Jim Fisk, and Jay Gould. I assume he did not take seriously Maury Klein’s revisionist book on the last named financier. In short, Wachtel recounts the old-style financial history, which concentrated almost exclusively on the negatives and ignored the positives. He remains a “robber barons” devotee.

On page 6, the author states that Alexander Hamilton chose to fund the depreciated Continentals at face value, and, while waiting for final funding, he issued new monies to replace them. Neither statement is true. Hamilton only funded federal debt certificates, most of which were issued after 1780. Where the author got the fanciful idea about a federal issue of new currency in the 1790s I cannot imagine. From this crucial presentation of misinformation, the text goes steadily downhill.

Wachtel does not seem to understand the present value of money methodology in assessing financial transactions. He repeats the old allegations that speculators who bought federal or state debt instruments in the early 1780s at discount prices invariably cheated the original holders. But that assertion is questionable on its merits and only comes into play in hindsight. Given the fact that buyers were purchasing debts with unknown maturity dates and suspended interest payments, the risks were extremely high and the future rewards problematic at best. Moreover, the sellers had the use of the sales proceeds for periods ranging from five to sevens years before funding became a reality. If the sellers invested in land, livestock, or slaves, they had the opportunity to earn from five to ten percent annually on their tangible investments. Numerous junk bonds issued by a host of corporate entities in the last two decades were trading at huge discounts from 2000 to 2002 — often at reductions of 30, 50, 75 percent of par. When some of these issuers manage to survive the “dot.com” meltdown and their bond prices recover, will Wachtel be there to proclaim that the sellers two years ago were likewise cheated by unprincipled speculators?

As it happened, much of the heavy trading in government debt issues occurred in the late 1780s. By then, prices had already recovered significantly from their earlier lows. Buyers did benefit in the end, and they likely relied on inside information, but the returns were by no means astronomical. As in almost all-previous accounts of these alleged injustices, the author does not cite precise buy-and-sell prices but just offers abstractions about the enormous undeserved profits. (If any readers of this review want to know the truth about what happened in the 1780s and 1790s, they can find a fuller explanation on pages 221-34 of Perkins (1994).)

The author fails to inform readers about the number of investors in the stock market during the nineteenth century — or about their economic and social standing. While hundreds, if not thousands, periodically lost substantial sums because of deteriorating business conditions or market manipulations, the percentage of the total population effected was relatively small. By and large, the wealthy lost money to other members of the same elite classes — probably less than five percent of American households owned securities. Mass participation in the capital markets, and thereby widespread losses during downturns, came only in the twentieth century.

Why academics at reputable universities write books of such questionable quality is a mystery to me. For money? For the satisfaction of performing a valuable public service — in this case, supposedly warning readers about the dangers of investments in corporate securities? Must be something! And why too do other academics, including recognizable economic and business historians, agree to offer favorable blurbs for the back covers? My fervent plea: will academics who don’t know a damned thing about financial history stop agreeing to act as manuscript referees and, in turn, stop endorsing these same books as well?

This volume is best described as a polemic against Wall Street and an expression of leftist indignation over the bursting of the high tech bubble after 1999. It’s really more about the sins of Wall Street today than what happened a century ago. The enticing title is a dead giveaway about the presentist orientation. Admittedly, many people did get hurt over the last two years, especially retirees like me. But Wachtel fails to consider that the current participants in thousands of public and private retirement plans, including many of his colleagues, have had favorable investment opportunities at low prices for a long string of months. Thousands of academics with modest salaries are still on track to retire as millionaires if they stay in the profession for thirty years and keep investing in TIAA/CREF.

My most damning criticism: no one reading this book would learn that the U.S. capital markets provided crucial support for a nation that has boasted one of the highest per capita incomes in the world for the last two centuries. Wall Street must have done something right, some of the time.

Wachtel would have been better served if he had dispensed entirely with the pseudo endnotes and focused strictly on catching the attention of the general public that revels in muckraking narratives. I do not recommend that any scholar acquire this book for themselves or for their institutional libraries. And don’t buy it as a present for your relatives, either.

Edwin Perkins, quasi-retired from the University of Southern California, is the author of Wall Street to Main Street: Charles Merrill and Middle Class Investors (Cambridge University Press, 1999) and American Public Finance and Financial Services, 1700-1815 (Ohio State University Press, 1994).