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

Based on an analysis of the leading trading markets for stockin the United States, I document the dramatic expansion thattook place in the scale and scope of the country's stock marketfrom the mid-1880s to the early 1930s. My analysis suggeststhat a broad-based stock market was a long way from being establishedeven by the early teens. It took the impetus provided by WorldWar I, plus the enthusiasm of the 1920s, to bring such a marketinto existence. I consider the capacity of today's fashionabletheories, which link the development of stock markets to improvementsin minority shareholder protection, to explain the growth ofthe U.S. stock market, and find that they cannot account forthe historical patterns that I identify. However, I suggestthat 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 duringthis period, especially an increase in the demand for stocksby institutional investors, notably banks and insurance companies,as well as the emergence of a retail market for stocks afterWorld War I. Second, there were also important developmentsin the supply of corporate stocks after the War, including theissuance of stock to fund the expansion of young firms, butespecially to facilitate mergers and acquisitions by establishedfirms, which seem to have played an important role in drivingthe expansion of the U.S. stock market.