The Expansion of the U.S. Stock Market, 1885–1930: Historical Facts and Theoretical Fashions

Abstract

Based on an analysis of the leading trading markets for stock in the United States, I document the dramatic expansion that took place in the scale and scope of the country's stock market from the mid-1880s to the early 1930s. My analysis suggests that a broadbased stock market was a long way from being established even by the early teens. It took the impetus provided by World War I, plus the enthusiasm of the 1920s, to bring such a market into existence. I consider the capacity of today's fashionable theories, which link the development of stock markets to improvements in minority shareholder protection, to explain the growth of the U.S. stock market, and find that they cannot account for the historical patterns that I identify. However, I suggest that there are other arguments that are worthy of further consideration. First, there were factors, besides minority shareholder rights, that led to changes in the demand for corporate stocks during this period, especially an increase in the demand for stocks by institutional investors, notably banks and insurance companies, as well as the emergence of a retail market for stocks after World War I. Second, there were also important developments in the supply of corporate stocks after the War, including the issuance of stock to fund the expansion of young firms, but especially to facilitate mergers and acquisitions by established firms, which seem to have played an important role in driving the expansion of the U.S. stock market.