The Rules Of The Game


A couple of years ago an editor at Scribner asked me to write a book covering the entire history of Wall Street. I was reluctant. I’d already written a book on the Wall Street of the Civil War era, and I have never liked writing about anything for a second time. However, suitably bribed with a generous advance, I agreed to undertake the task of making a story from a piece of the past that is now 346 years long, running from 1653, when the wall that gave the street its name was built, to the present.

Writing books is a funny business. For one thing, it is one of the very few commercial endeavors that are undertaken in solitary; for another, the writer is often working hardest when he seems to be doing nothing at all. Writers stare out windows a lot. Some are very disciplined (Anthony Trollope wrote fifteen hundred words every morning before going off to his job at the British post office). Others, myself most definitely included, are adept at finding excuses to write tomorrow instead of today. Some write only at night, some only in the morning. More than a few writers, including very great ones, have found alcohol useful in the creative process.

I didn’t try demon rum to stimulate the muse (I’m a bad enough typist as it is), but for a long while I didn’t get very far because I didn’t know what story I wanted to tell. Narrative history is storytelling, just as a novel is. The only real difference is that novelists make up their characters and situations and historians don’t. That is fine by me because God creates far better characters and events than I ever could. But while the history of Wall Street is full of extraordinary human beings and thrilling events, that does not alleviate the problem. If you simply string them together, one after the other, the result is boring and unsatisfying. What would make the history of Wall Street hang together as a single story?

Then I happened to stumble upon a passage in a classic book on Wall Street’s ways, Edwin Lefevre’s Reminiscences of a Stock Operator . “Nowhere does history indulge in repetition so often or so uniformly,” Lefevre writes, “as in Wall Street. … The game does not change and neither does human nature.”

It seemed to me that Lefevre was only half right. While the basic game that is played on Wall Street every working day does not change, the rules of that game certainly have. The reason is simple enough. The game has been played during the course of the most concentrated period of change—economic, technological, social, and political— in the history of the world. And much of this change provided Wall Streeters with new opportunities to profit.

But how did Wall Street keep its game from self-destructing as the players devised more and more new tactics and strategies to pursue their self-interests? This problem—that the trouble with capitalism is capital ists — was recognized as long ago as Adam Smith. “People of the same trade,” he writes in The Wealth of Nations , “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”

The urge to win must therefore be restrained by the rules (and by the referees who enforce those rules; imagine the Super Bowl without those men in striped shirts on the field). So the history of Wall Street, it seemed to me, was not that different in a sense from the history of American football. That game (which is a zero-sumone in the mathematical sense but a multibillion-dollar industry in the economic one) began shortly after the Civil War. It came about because some colleges, such as Princeton and Rutgers, played a form of football that resembled modern-day soccer while others, such as Harvard, played a game more akin to rugby. Over about forty years the two games were fused into a profoundly new game quite unlike either.

Just as on Wall Street, where the basic game has always been to buy cheap and sell dear, in football the basic game has always been to get the ball to the opponent’s goal line. In the course of those forty years, however, all sorts of ideas for exactly how to get it there were tried out. Some were quickly abandoned while others were just as quickly adopted. The flying wedge, in which the line formed a V around the ball carrier, began to evolve in 1884, but it was banned ten years later, when it was decided that it gave too much of an advantage to the offense (and produced far too many injuries as well). The forward pass, on the other hand, first introduced in 1906, transformed the game in very positive ways and was quickly made an integral part of it.

This constant experimenting with the rules of the game to make it both fair and exciting is exactly what happened on Wall Street. I had my story.

There have been four major bursts of rule making on Wall Street since it began as a financial market in the early 179Os. It is instructive to look at these episodes and see just who was the driving force behind each.

In the early days, before the Civil War, the market was so small and had so few players that it could be governed as informally as a backyard touch-football game. But when the war suddenly transformed the Street into the second-largest securities market in the world, with billions in play, that system broke down almost at once. And the legal system could not help out, because it was, at the time, utterly corrupt.