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Thursday, September 9, 2010

NYSE During WWI – Why the Shut Down?

The history of the New York Stock Exchange is littered with colourful stories that feature soaring stocks and bonds, horrible crashes, as well as ceremonies to mark significant moments in history and even simple holidays.

When World War I broke out in 1914, the governing body of the New York Stock Exchange decided to suspend trading. In retrospect, an initial closing was probably a good idea since holdings in Europe of American securities were more than likely going to be extremely unstable. The shut down was considered to be an emergency measure, but a necessary one to keep the market from crashing altogether.

The market closed on August 1, 1914, but what shocked so many was that the market didn’t just close for a day or two, it closed for four months. While by today’s standards, the idea of no trading for four months seems outrageous and basically impossible, traders in that time felt exactly the same way. The only other time up to that point in the history of the NYSE that there was a closure was during the Panic of 1873, which featured over 30 firms on Wall Street to go out of business. But even then, the exchange only closed for 10 days, not months. So, what was the cause of this extended closure?

One of the major reasons was the president at the time Woodrow Wilson. He felt it was very important for all the Federal Reserve banks to be up and running before the stock market was reopened. But Wilson’s treasury secretary kept the market closed even after those banks were online. Why? The emergence of a secondary and much smaller trading market called the New Street Market had opened, and while it was a far cry from the organization and scope of the NYSE, it did help relieve some of the pressure that not having the NYSE open caused.

The New Street market was never really taken seriously by major business. The New York Times and the NYSE made sure the New Market didn’t gain any traction in the city. The NYSE heavily lobbed the government to reopen so they could put an end to the New Market once and for all.

The NYSE was kept closed for four months mainly out of fear of a crash that would plunge the economy into a recession or an all out depression. The New Market helped to get some trading done and when the proper safeguards were in place, the NYSE reopened.

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