Full text of A History of Investment Banking in New England

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A
HISTORY

OF
INVESTMENT
BANKING
IN
NEvV ENGLAND

FEDERAL RESERVE BANK OF BOSTON

To the Reader:
Since the early days of this nation, New England investment banking houses have contributed significantly to the
economic development of both the region and the country. As
securities underwriters and dealers, either individually or as
members of syndicates, they have played vital roles in the
creation and expansion of innumerable manufacturing, transportation, communication, public utility and other business
enterprises. And through their work in the field of state and
municipal bonds, they have aided notably in the development
of public facilities and services.
The study presented in the foJlowing pages was first published as a part of the 1960 annual report of the Federal
Reserve Bank of Boston. Jt is now reprinted as a separate

booklet in response to continuing requests from teachers and
students of financial history throughout the nation.
August, 1965

George H. Ellis, President
Federal Reserve Bank of Boston

CON'I'ENTS

Financing Before the Civil War
The Civil War and Subsequent Expansion

Page
5
13

The Turn of the 19th Century
Developments of the 20's and 30's

Financing Since World war II

*
• £_\\VE
~,.:,

84,y

•
,t-

...

* . .,
"!"
<l;t,J
Cl

.
'/,,
('I

,..o~~JP'
1',,,
01?4i£D N\p:'
*
*

•

a History of

Investment Banking in Ne"\V England
FEDERAL RESERVE BANK of BOSTON

)

c,,l((~I

i11

entitled lo one Sluu-«; 1,i:: .• I\:.,.
of th, property of the

thr

rn1111ly

II O )

New 1l,41UIJGbln •~on .114ttorv CComi,anJ):

able only by deed absolute and without condition, under

/4.j

tnnisfer-

hand and scul, admuwl-

rd;,red before some Justice of Lhc Peace, and recorded by Lite Clerk : and lite purchaser,
sluuciug lo the Treasurer of soul Company such deetl so recorded, and tlelioering up thi«
('al{j;cale, shall be mtitled to a netr certificate, culifying lite property of such share to
l,,-

iu such purchaser.

In tt'rJtimon~ WIJCCtOf, I the Treasurer have signed this certificate,
and <!ffe,red th, seal of soul Company thereto, this -y _..

tiny of

)/( /

I, I;(

in the year of our Lord onfthousand eight

lwudred au« t'~u,, / (

✓
~reas1,rer.

FOREWORD
Modern investment banking is a product of evolution, reflecting economic and financial developments of the past. The industry's present
organization, functions, and range of services are
designed to meet the demands for investment
capital in a highly industrialized society with an
increasingly broad investor class. In a little more
than 100 years the United States economy has
been transformed from one predominantly agricultural to one with industries using large amounts
of capital on an intensive basis. This transformation was facilitated and speeded by the contributions of investment banking, with New England
firms playing a major role in the process. The industry today provides a channel through which
savings are transformed into permanent capital.
To a considerable degree the high output per
capita of the nation's industrial system results
from an extensive use of capital. Increasingly
rapid technological change, characteristic of the
postwar period, places a premium on the development and replacement of capital equipment such
as generators, turret lathes, hydraulic presses, entire manufacturing establishments. With a rapidly
growing labor force, investment must continually
be made merely to maintain the existing level of
output per capita. Productivity must be advanced
at least enough for a nation to hold its position
in world markets. In addition, there is a broad
field of public investment, such as highways,
bridges, schools, and hospitals, which provides
services essential to productive efficiency and to
an advancing standard of living. The long-term
borrowings for these purposes also constitute a
demand in the investment market. When both
corporate and public financing calendars are
heavy, the investment banker's problem becomes
increasingly complex.

Since World War II the demands for capital by
both corporations and governmental units have
been at record levels. In the private sector of the
economy new security issues provide about onequarter of the funds required for expansion or
other capital purposes; retained earnings account for the balance. Although the amount of
new money raised through security issues may be
marginal in relation to total capital investment in
the private sector, it represents a major portion of
capital outlay of particular firms. During the years
1946-1960 nearly one company in three with
public ownership of stock floated one or more new
issues of securities.
In 1960 the number of corporate issues exceeded
1,200, ranging from less than $100 thousand to
more than $250 million. More than 400 investment banking houses were involved in originating
and underwriting these issues, and at least 1,000
firms participated in their distribution. During the
postwar period the volume of new corporate capital issues has ranged annually from $6 billion to
$12 billion. The issues of state and local governments aggregated almost $8 billion in 1959, the
highest figure on record. The total was only $1
billion at the close of the war.
The investment banker plays a distinctive role
as an intermediary between the issuer of securities
- private corporation, municipality, or state government - and the investor - individual, insurance company, pension fund, or other institutional
investor. In this process the investment banker
provides a series of interrelated services for the
issuer - the formation of plans for raising capital and the assumption of risk through purchase
and distribution of the securities. The banker
provides immediate capital for the issuer and

reaches the market which will afford the best
possible prices and the desired distribution of
securities. The compensation - which varies - is
the difference between purchase and sale prices of
the securities, and represents in part profit for the
undertaking of risk and in part compensation for
the work performed in "originating the issue" and
concluding the sale. Investment banking firms will
be found in some communities with a population
as small as 25,000, but are for the most part concentrated in the larger cities, particularly New
York, Chicago, Boston, San Francisco, Philadelphia and St. Louis.
New England financiers and financial institutions
contributed significantly to the early development
of investment banking. Before the emergence of
the specialized firm in the industry and of
primary capital markets, New England merchants
were leaders in establishing new sources of credit

and actively participating in the creation of productive enterprises. They placed mercantile capital in New England textile mills and in railroad
financing and other ventures on a national scale.
They also established links among the several
domestic capital markets as well as between domestic markets and those in London and on the
Continent. During the period from 1840-1855
Boston became the nation's principal market for
railroad capital. The region had large holdings of
domestic capital and experience in financing its
own railroad construction. It also had established
a secondary market institution, the Boston Stock
Exchange, and had a group of individuals and
institutions experienced in purchasing locally issued bank, insurance and public obligations. Some
of the firms now in existence trace their history to
predecessors founded between the 1820's and the
1850's. These early firms laid the foundation for
specialized functions in the capital markets.

:>.-..(· '.)"(~')'I; . ~)~ •.)41(,.,.,
m~
t . . .,_.., . , . . . ,.. ,_ . . __ ·SIX PER
i {~•··• .,. ~l

•)4'-(~)4'.(•)~(~)4' <'i -"'-·

"),111(

CENT. STOCK 01'' 1812.

Banltqf the United Stat('ll,fll

(w ·o. ~
~)

'~~-: -~~( ).-( )~,( ..)~(~,) ~(' ~--<' ')tlf( •~'
.....
J ·,,

BE IT KNOWN, Tll.BTtlure is clue from the

S£, ;,,/ J Ji: ~r:c-u,

or ,41.)

assigns, the RUm

of l/:
(( / • {

~//,/C

·,
I

{I)(;'

('1

.,..,

1;~ ., ;,

181/'

U.NI'I;ED Bf.ii.TES of JU(J;RIC.!J,;mto

t/ C,

/,,,- 1/,L ..// ,,£ ?t' t c_(

,~4q,_, -1 /,

';./

l'7

; !_ c/

;
;

r 'v_
.

"" ._

,~i.Z:~id:w~~t?
,...,.

~DZ )'ii(

Counter1ig,1Pd

✓.;;.,.

c ;;;.7

~..l

•

..,;-.

.....

~
, ....
,.:

f..,/

.,..

.....

•

Ca11h1er.

•

·';;·
•,l
. ·;·.,

,.•"~

cli,0n /7 1 rk<,,. 9"/2 a" f c...

.',

'e. :

that ptLrpnu.

l -=--------/ n» ,-:,r-·.['j-Y~,.':f"if~W L,-,-;r

,,;,....,...
~~\

'/Jt,.,/4,.

;t✓-~ / / .,, day of
/y incltuively, payabu
being Stock created in pur,umue of"" .a,,(' of ('ongress, pautd on,(
;{~ day ~fareh, 18 t!, entitlecl '- .'In
f ./lrt authorizin{f a Loan for a sum not exceemi Bl.teen MiUuma uf Dollars;'' the Principa of wl1ich Stoel.· is reimbursable
i nt tlu. pleasure of the United Stnte«: fd anu ti,u after the uut day of December, in tlle year t8:!!4; u,ltieh debt ia recorded in,
i and traneferable only at, thi« Rank, bv nppearanee ir& person, or by attorrtty, accordin& to the rules an1lforms instituted.for

zziz:

J bl'(lrill~ Iutereet at Six J>er Centum per .8.nnu,a,j'l'Offl. tht

.'•·

.._. ...-_ ,.. ,,,...,......_._
,,
~.......,,........._........ ...
),a,:(_ ),r.(♦• 1<'.i'>,<.... )~(.-.;rjf."(. ~(~
),4:.'t'J'tl(.,)it<i>t1(•)ll(ff.)·11<.§>,,{.

.>'l<.

,-;(!)Ji•(•)-'(j)JJ'•()<

Chapter I

Financing Before the Civil War
Investment banking in the United States did not
begin to emerge as a distinctive specialized function in the nation's capital markets until after
1860, and its later development paralleled the rise
of the great industrial combinations of the late
19th and early 20th centuries.
The first half of the 1800's witnessed some major
developments in American banking and business,
developments which shaped our present institutional structure. In this period businessmen, bankers, and investors emerged as distinct groups and
the separation of ownership and management of
business began. Although considerable reliance
was still placed on British and Continental sources
of capital, and arrangements between the American and foreign capital markets were increasingly
developed, an institutional structure for effectively
utilizing American capital advanced rapidly. Commercial banks, private banks, insurance companies, brokers, and dealers in securities assumed
the basic form and structure with which the financial system operates today. Another characteristic
of the period was the financial and commercial
rivalry of Boston, New York, Philadelphia, and
Baltimore. Dominance in the capital markets

shifted among these cities, being held by Boston
from 1840-1855 before gravitating to New York.

Early Sources of Capital
In the first quarter of the 1800's there were few
issues of securities and few. investors. Securities
were largely limited to a few government bonds
and the common stock of insurance companies
and corporations formed to build turnpikes,
bridges, and canals. Some private banking firms
continued to handle lotteries, which had become
an accepted and important means of helping finance private as well as semi-public and charitable projects. The purchaser of the ticket gambled'
on a prize; the undertaking secured capital, and
the seller received as a commission a percentage
of the money raised. Among the lottery tickets
sold in 1812 were those for Harvard College and
Union College.
The story of S. & M. Allen & Company, established in New York in 1815, illustrates certain
aspects of the early development of private banking. The firm established bank partnerships ( the
Allens and one or two resident partners in each

branch house) in a number of cities including
Boston, Providence, and Portland. Their chief
interest was in selling lottery tickets and, in addition, they did business in bank notes, commercial
paper and some foreign exchange. In the 1820's
they began to deal in stocks and bonds, gradually
discontinuing lotteries. The Allen partnerships
were dissolved in 1837, but the partners and some
of the clerks continued to operate as bankers and
brokers. The Allen partnerships represent a transition from an enterprise which performed a variety of banking services to another that was more
specialized and permanent and which contributed
to the early development of the investment banking function.
In the early part of the century the most important business activity was foreign trade and
shipping. Probably the greatest single source of
capital was the merchant class, which comprised
small country storekeepers as well as such
wealthy metropolitan merchants and importers as
Thomas H. Perkins in Boston, Stephen Girard in
Philadelphia, John J. Astor in New York, and
George Peabody in Baltimore. The merchant
was trader, commission merchant, warehouseman,
carrier, banker, and sometimes manufacturer. The
capital and experience which these merchants accumulated, coupled with the introduction of machine manufacture and the increasingly widespread
use of the corporate form of organization, brought
about business and financial changes in the second
quarter of the 1800's. Among the merchant's
numerous functions, the supplying of banking services to the community led subsequently to the
formation of private investment houses. These
were the forerunners of modern investment banking houses, some of which are still important today.
Merchants were often the leaders in chartered
commercial banks, some of which made long-term
advances directly to borrowers. Through longterm loans and frequently extended short-term
notes, banks were, in reality, providing investment
capital.
After 1830 American business activity began to
spread inland from the eastern seaboard. The
general merchant gradually gave way to the specialized businessman who often provided only
managerial ability and looked to a new class of

HISTORY

INVESTM EN T

investors to provide capital. Nonspecialized merchant banking continued to exist and, as business
increased, some firms began to drop other lines
and become specialized private banks.
The careers of New England's China trade merchants like John Perkins Cushing, John Bryant,
and William Sturgis illustrate the separation of
ownership and management, the concomitant rise
of the investor class, and the early development of
investment banking. Upon retirement from trade
about 1828 Cushing became a customer of Bryant, Sturgis & Company. The firm held Cushing's
uninvested balances on which they paid interest,
and managed investments for a fee. Cushing's investments, as well as the firm's own, were distributed during the 1830-1850 period primarily
among firms with which Sturgis was personally
acquainted. The extent of the investment in each
firm was governed by a desire for wide diversification in the portfolio and maximum earnings.
Many of the investments were in New England
companies, but securities from the West and MidAtlantic regions were also included. In such
fashion the capital of Cushing and other merchants was transferred from foreign trade to the
country's internal development.
The formation of stock exchanges served the dual
purpose of providing new capital and broadening
the market for existing securities. In addition it
prompted the transformation of the early commodity and share brokers into dealers in securities. The New York Stock Exchange was organized about 1792 and the Philadelphia Stock Exchange about 1800. By that time a considerable
business in stocks had developed, reflecting t~e
growth of corporations engaged in banking, m.
The
surance, manufacturing, and transportatwn. .
late l 820's and the 1830's brought a great m. t h e secunnes
. . b usmess.
•
An exchange
crease m
.
.
B
t
n
in
1834 which
was formally established m os o
listed primarily stocks of New England manu.
.
h by later standards
facturmg companies. Thoug
these early stock markets we re small
. and trading
·i·
•
.
.
.
h
helped
build
up . an 1·0 .
f act ities pnm1t1ve, t ey
ves t.mg pu bl'1c w h'1c h was wilhng to provide risk

BANKING

NEW

ENGLAND

units, capital was provided privately and the firm
was expanded out of profits.

capital for private economic development. This
was particularly important in New England, where
equity capital provided most of the funds for the
textile industry and the development of the railroad network. Some of the trading in stocks was
independent of both the brokers and the exchanges; it was handled by merchants as part of
their trading operations and to a lesser degree by
some of the chartered banks. After the 1830's
"free banking" legislation by a number of states
greatly encouraged the creation of new commercial banks and stimulated investment and trading
in bank stocks; and in turn these banks performed
an increasingly important part in assuring supplies
of capital both directly and indirectly.

Origination of New Securities
New issues of securities were placed on the market by various methods. Some were sold directly
to individuals. Others were offered to the public
at some central meeting place where subscription
books were opened. Large investors often requested brokers to subscribe for them, thus saving
themselves the trouble of appearing in person.
Brokers who anticipated an unusual demand for
a particular issue would subscribe on their own
account hoping to resell the stocks or bonds at an
advance. Promoters offered concessions to influential brokers, hoping to secure the advertising
value of their names. In this way, there gradually
developed an affiliation between the broker and
the issuer of new securities which contributed to
the development of investment banking.
Small issues were sometimes handled by an incorporated or private local bank which disposed
of its holdings through correspondents if the immediate market would not absorb all of the securities. In communities like Springfield, Worcester,
New Bedford, and Hartford some securities, such
as those of banks, transportation companies and
textile mills were sold directly to local capitalists
or banks who bought them not primarily as investments but to aid local enterprise. In the cases
of comparatively small or family-owned industrial

Investors seeking more than a local or personal
market came to rely on middlemen. This was especially true for securities originating in the West
or other areas far removed from the financial centers. The securities sold in the financial centers
were primarily federal and state bonds, issues of
canal and railroad corporations, and shares of
banks and insurance companies. In spite of the
development of the stock exchanges, there was no
large class of investors capable of exercising independent judgment in the selection of their investments. The brokers or private bankers distributed
the securities within their own communities, to
capitalists with whom they were in touch or to
agents like themselves in other cities. In this way
something like a regional and even national system
of security marketing developed without any one
centralized market. For example, William Sturgis
of Bryant & Sturgis of Boston bought bonds and
stocks through Prime, Ward and King of New
York, thus entering into a larger decentralized
domestic market.

European Capital and
American Development
In Europe the investment banking function had
become specialized much earlier. Fortunes
amassed in the 18th century by Europe's mercantile interests enabled those concerns to devote their primary efforts to investment banking
as early as the l 780's and 1790's. The House of
Baring in London is an excellent example. Using
wealth accumulated mainly in mercantile pursuits,
this family organized its investment banking enterprise in 1763. Potentialities for American economic growth attracted its attention from 1 790
onward, and the financing of American trade and
the marketing of American securities was its major interest from 1828 to 1861.
In the late 1820's and the 1830's promotion of
new enterprises gained considerable support from
foreign capital. British and Dutch investors, encouraged by the high yields on American securities,
developed a strong interest in investments in the
United States. They purchased stock of the Sec-

ond Bank of the United States, state bonds, Erie
Canal bonds and early railroad securities. Close
relations were built up between American and
foreign merchant bankers who purchased American securities for retention, or for distribution
among foreign investors. A number of these foreign houses established branches in the United
States and developed a clientele among wealthy
merchants in eastern seaboard cities. In Boston
the Barings used Thomas Ward and later Thayer
& Brother as their agents, thus establishing the
close relationship which still exists with Kidder,
Peabody & Co. - the successor firm to Thayer &
Brother. The Hopes of Amsterdam and the Hottinguers of Paris, among others, also had one . or
more agents or correspondents.
American Securities Owned Abroad in 1853
( millions of dollars)
Total
Outstanding
United States
$
58.2
States
190.7
Counties and cities
93.3
Railroad bonds
170.1
Railroad stocks
309.9
Banks and
insurance
279.6
Canal and
navigation
58.0
Miscellaneous
18:8
$1,178.6

Percent
Foreign ForeignOwned Owned
$ 27.0
46
111.0
58
21.4
23
43.9
26
8.0
3
7.1

2.5
1.1

$222.0

Source:
33rd Congress, 2nd Session, Executive Doc. 42.
See also Myers, New York Money Market, Vol.
I, p. 36.

Demands for capital were heavy during the period of internal development and railroad extension between 1850-1860 and the amount of
securities held abroad increased more rapidly than
in any other decade before the Civil War. State
securities held first place in volume although some
of them were repudiated issues purchased before
1840 and held unwillingly. The railroad securities,
which ranked second in amount, had been purchased after 1838 and most of them after 1840.

State and Municipal Securities
Debts of the various states were assumed by the
federal government in 1790, and from that time

HIST O R Y

IN V E ST M E N T

until 1830 long-term state and municipal securities issues were relatively rare. By 1830, however,
the demand for improved means of transportation
and the expansion of the banking system were
creating an ever-growing demand for capital. By
1841 state debts totalled $231. 7 million and municipal debts had reached $27 .5 million. Nearly
two-thirds of the borrowings were used to finance
the building of railroads, canals, turnpikes, and
bridges, and most of the remainder used to capitalize banks.
Similar building programs in New England were
financed with much less long-term borrowing.
Connecticut, New Hampshire, Rhode Island, and
Vermont had no state debts as late as 1841.
Maine issued $1. 7 million of debt between 18 3 7
and 1841 for general purposes including schools,
hospitals, and expenses incurred during the northeastern boundary difficulties with Great Britain.
Massachusetts issued $6.5 million of securities in
the same period to aid railroads, principally the
Western Railroad. In 1841 Boston's debt was $1.5
million; that of Providence, $222 thousand.
From 1840 to 1860 various governmental units,
mostly municipalities, financed public improvements and aided railways either by purchasing
their securities or by issuing securities on their
behalf. This policy of state and local support of
internal improvements was not a break with past
tradition, but merely a modification of policies
initiated in colonial times. It had been common
practice for states and cities to grant monopoly
privileges to aid private ventures which held the
promise of increasing the economic strength of
the community. In 1667, for example, the Massachusetts General Court, by resolve, offered a 21year monopoly to anyone who would build a
drydock.
During the two decades preceding the Civil War,
Massachusetts was one of the few states which
continued to support railways; by 1860 Massachusetts had devoted some $7 .3 million to railroad
development. In areas where state governments
refused support, localities aided the railways they

BAN KING

NEW

EN GLAN D

Deudopmcnt of Textiles
in New England
hoped would bring permanent prosperity to their
communities. Prior to 1860 towns in Massachusetts spent $228 thousand in support of railroads.
In Maine, Portland contributed $2 million to the
Atlantic & Northeastern. In Rhode Island and
Connecticut, local aid was lavishly given. Hartford, Bridgeport, New London, Norwich, and
Providence contributed heavily to the railroads.
Massachusetts and Boston retained their ties with
the London house of Baring Brothers, which marketed large portions of their issues. In instances
where cities exchanged their securities for those
of a railroad, the railroad company undertook the
problem of marketing the city issue. In most
cases the government securities were given by the
railroad company to contractors in payment for
work performed, in which case the contractor had
to market the securities or use them as collateral
for commercial bank loans.

.;., ,::;;.,.~,,..,'
~

/-'/,IM
I

,,, M,

,.,

14t1
►

<✓ £

(,,,111y "I

"',/, WOl{('l•'.''f .14 II

-·

(,r I'll/Ii.I i I

/;:,..~ ,'"t1.>

• df;tn

~' . /•
e oroot·atton.

,-~) ,;-UtlWtlic

~ -~~~ ~tC¢.Mn

t ,,_ ,.,,: ..

~ ••,,_
I)

?('f

l'IKg l Olll'IIIL\ I 10 ,

) /J. l'l/1.ll"'
fk'

..I

X I

Local banks were a major market for state and
local government securities since they were often
required by law to hold some of these securities
as a reserve against their note issues. The practice of selling municipal bonds to local banks and
individuals without public notice gave way, as
the issues became larger, to the advertising of new
issues and their sale on a competitive basis.
Blocks of these bonds were purchased for resale
by individuals and institutions, and these intermediaries, therefore, performed in a small way
the function of the modern investment banker.
By the outbreak of the Civil War outstanding
state and local issues in the nation totaled about
$ 200 million each.

In the second quarter of the 1800'~ New England's financial institutions moved more rapidly
toward specialized functions. Specialization was,
in turn, accompanied by the development of closer
working relationships between institutions. This
factor, along with the tendency to concentrate
available capital in the more promising enterprises, was a notable stimulant to cotton textile
manufacturing and the inland extensions of eastern railroads.
Concentration of resources in cotton manufacturing made it the first American industry to feel
the full impact of the Industrial Revolution. By
1860 cotton manufacturing represented a capital
investment of over $93 million, of which over
$65 million, or 6 percent of the $ 1. 1 billion total
capital investment in all industries in the nation,
was in the New England states.
Particularly important in New England was the
"Massachusetts" type of textile mills such as the
Amoskeag, Boston, and Lawrence, which were
large integrated operations as compared to the
small, single-operation ( "Rhode Island" type)
mills that prevailed in other areas. Unique in the
capitalization of these integrated mills was the
heavy reliance on equity financing. Heretofore,
only small local industries· had been able· to attract equity capital.
Stock sales provided almost all of the original
capital for the integrated mills. During the three
decades from 1829 to 1859 mercantile groups
provided about one-half of the original equity.
Non-textile merchants and firms subscribed to onethird of the new issues. Individual holdings
ranged from $2,500 to $200 thousand. Less numerous, but with larger individual investments, were
the textile merchants, who bought about 17 percent
of the dollar volume of new issues during the late
1830's and early 1840's. In addition to making
an investment they assured themselves of a supply of merchandise. To some extent, shrinking
returns from foreign trade led merchants to turn
to textiles because they were the only important
alternative investments available. More signifi-

HISTORY

INVESTM ENT

cant, however, was the favorable profit record of 9
to 10 percent on capital stock.
Financiers also performed an important function
by supplying large textile firms with new equity
capital from their own funds. Individual investments averaged about $10 thousand, and the investors included bank officers, insurance company officials, brokers, and private bankers. Indications
are that their investment policies were strongly influenced by current profits shown by the industry.
Particularly striking were the almost complete absence of foreign capital and the very small amount
from other parts of the United States. Essentially,
textile firms were locally financed.
Many financial institutions received their first experience as intermediaries in equity financing with
the textile industry. Insurance companies acquired
stock as a permanent part of their investment
portfolios. Commercial and savings banks acquired the stocks as collateral on loans and sometimes took title as a result of forfeited loans.
Brokerage firms frequently purchased textile stocks
for resale. As a group, however, institutional
investors did not often buy new issues from the
issuer, but were typically a part of the secondary
market. In this way, they freed the funds of individuals who in turn provided the primary market
for investment in new issues.
The mills also secured capital through long-term
loans. Savings banks and trust companies were
the chief suppliers, making loans for as long as
10 years and supplying about 70 percent of the
total funds for loans. The remainder was largely
supplied by individuals, most of whom were retired merchants.
The record suggests that experience with these
mills proved equity capital to be a sound means
of financing large industrial developments. Individuals and financial institutions gained experience in investing in, and acting as intermediaries
for common stock issues. For the first time in
America it was demonstrated that a large industry could be financed without substantial foreign
assistance. Generally satisfactory results, both in
safety and return on capital, advanced the use of
equity financing in later years.

Railroad Financing in the
Nation and New England
During the 1830's, the first decade of railroad
building and the greatest period of canal construction, three techniques were used to finance railroad projects. Most important was the use of
government funds, either directly in state-built
projects or indirectly by grants of state credit to
assist private transportation companies. The latter was accomplished by the sale of state bonds
for cash and the use of the proceeds to buy the
securities of private companies, by the exchange of
state for private obligations and by state guarantee
of private bond issues. Sterling bonds issued specifically for the English investment market was a
second way for private companies to raise funds.
The stock share was used infrequently except in
New England.
Railroad finance of the 1830's was dominated by
the pattern set by Philadelphia. The middle Atlantic and midwestern states all depended heavily
on bonds issued either by the states or by the
companies themselves to pay for construction of
their transportation systems. They also tended to
rely on Philadelphia, either through individuals
like Moncure Robinson or through the Second
Bank of the United States, for assistance in marketing bonds in England. As long as England
considered American securities a good investment, such financing was possible.
The panic of 183 7 and the resulting depression
delayed the development of transportation in
Pennsylvania and the states to her south and west.
After the collapse of American credit the English
market would no longer take American bonds,
public or private. Between December 1840 and
December 1846, only 86 miles of railroad were
reported as having been constructed in Pennsylvania, and even fewer in New Jersey and the seaboard states south to Georgia. With the depression, and the closing of the Second Bank, Philadelphia lost her dominant position in American
transportation finance. New York's function as

BANKING

NEW

ENGLAND

an important market for railroad stocks also ended
tern porarily in 18 3 7.
The rail promoters of New England suffered less
than those of Pennsylvania and other states to the
south primarily because during the 1830's they
had been far more self-reliant financially than
their neighbors. Stock issues rather than loans
had paid for the first railroads in the area, and by
far the largest portion of the stock was sold in
communities along the rail lines.

Boston Dominance in the
Nation's Capital Market
New England, in general, suffered less than any
other section of the nation from the depression of
18 3 7 and was also the first region to recover.
Prosperity encouraged the building of more shipyards, more textile mills and especially, more
railroads. Between 1845 and 1850 the region's
basic rail network was completed. Almost twothirds of the 3,660 miles built in the region in the
30 years before the Civil War was constructed between 1845 and 1851. Boston financed the railroad and industrial expansion of New England in
the l 840's and in doing so, quickly became the
center of American railroad finance. Roads to
the south and west, which had depended on Philadelphia, New York and England for financial support, now turned to Boston. The two most
important Pennsylvania roads, the Reading and
the Philadelphia, Wilmington & Baltimore were
reorganized and revived in the mid-1840's with
the aid of Boston capitalists and Boston capital.
Such prominent New Englanders as David A.
Neal, John E. Thayer, Nathan Appleton, and
William Sturgis became closely identified with the
Reading, and by 1849 its control resided in Boston.
During the early 1840's the railroads in central
New York associated with Erastus Corning also
looked to Boston for aid, establishing relationships
with John E. Thayer and J.M. Forbes who helped
market securities in Boston. In 1845 Thayer and
Forbes joined with Corning to purchase the Michi-

gan Central from the state, and in the following
years financed its construction across the state to
New Buffalo on Lake Michigan. By 1852, the
line had been extended to Chicago, making the
first all rail connection between Chicago and New
York. At the same time the New Englanders
Samuel Henshaw and William Ward reorganized
the Mad River & Lake Erie Railroad in Ohio.
Before 1850 the buying and selling of corporate
securities were generally handled on a personal
level. It was on such a basis that Stockton, Robinson and others raised funds for the roads in the
middle Atlantic states in the 1830's. During the
next 10 years railroad promoters of New England
and the West who came to Boston for funds dealt
personally with individual capitalists who were
likely to influence others. Such moneyed men were
willing to invest their funds in these railroads because they had firsthand acquaintance with the
conditions, prospects and, most important, the
management of the roads. This became less and
less true after 1850 as the number of roads increased; with nearly 100 instead of a dozen trying
to raise money, the individual promoters faced
increasing difficulty in obtaining capital from
personal acquaintances. Nor could investors in
the East and in Europe easily contact the officials
of the road for the purpose of purchasing its secu~ities. Still fewer were their chances of knowing
its management personally. Both the users and
suppliers of capital soon found it advantageous to
rely on specialized banking firms. In New York
the firm of Winslow, Lanier & Company and in
Boston the firms of Henshaw & Ward and John E.
Thayer & Brother specialized in buying and selling
rail securities. Reliance on intermediaries made it
possible to tap a larger number of investors, and
the investors themselves were provided with a
wider choice of securities.
The institutionalization of the investment market
for railroad and other securities also led to its
centralization in New York. The city exploited
its combination of geographical advantages in
oceanic, coastal and inland shipping, becoming
of first importance as a commercial center. The
earlier personal investment was bound to be predominantly local, with each large city providing
the capital required by its radial roads. Only

By 1857, however, far more railroad securities
were listed in New York and these included nearly
all the important roads in the nation. Boston and
New England capital and capitalists, however,
continued to be an important influence in the development of railroads to the West.

Boston, Philadelphia, and New York financed
more distant roads, and New York before 1850
had been much less active in railroad finance
than either Boston or Philadelphia. In 1850 Boston listed on its exchange many more securities
for railroads outside its region than did New York.

...,.~~~,

L;:::it ST. CROIX AND LAKE SUPERIOR MINERAL COMPANIY,

I/,,

/ ,;/

I -;:

I I;, I

f',f

11,1.11 J11h,1 f).u;i.nlVJ' .J1!l11.1.rnl 1J.vmp1111,11,

1 ,/ur

r//J'/;,(A /

tJ'Pi'J:: ~/}t
h 6 A• I

ntstu,.

'/:
I I

//I

10111/1 I

/,01~,/.
l,.J/IL', •A H•"'llli'I~

/1 1,/,,

1/
11r

/11

,11////I

/it 1/0

I /,l// //,I

I/ , ); I II' II '/ I ,

1 lh

Il111lt, 111111 ;,I,,
tj t//1

)///// Ill;;. I

,111

l,'r/l/4 I

11/4_,

Ur.ii.Jl~.al~ WU~IWJJ

l/:;

/;111

I ;j,,

I /I

• ,11171rl

I ///011/11 II

//, 1/ 1

1/ lrll/1,

'1; /,,{:, '>°

l11/11111't I, ~ 11711,,,/ly 1h1 I

iii/I/

ll1171111y

I/I,

' 1:1 l'I;; 1111111/ 111111//// I

1 (/1

//11/u,

/l/)/y/l///l/1///411//111

~ / ·/111
i

I I I I,

«11 /I

7 I/ Dffln!fl.lr! --•·'l l 'CI--·

1 11111I

(

/( / /

/r11,y/;1//li'II//.J

I I 11:111111

r/ /11

/4ti

"/
V

/t //; #

I {~

Chapter II

The Civil War and Subsequent Expansion
The Civil War marked the end of the first period of development of American capital markets
and their institutional framework. During the
years immediately preceding the war, banking and
other forms of financial organization moved toward greater specialization, and large scale activity became increasingly centered in New York.
By the time of the war, investment houses had
developed in Boston, New York, Philadelphia and
a few other cities, which purchased large blocks of
municipal and railroad securities for their own
accounts and for later distribution among their
clients. Partners of some of the houses had promoted or participated in the promotion of the
railroads whose securities were purchased. Moreover, a number of strong commercial banks had
developed which co-operated with each other and
private bankers in purchasing issues - part of
which they retained and part sold. This institutional framework became important in the financing of the Civil War.

The pressing financial needs of the war led to
huge borrowings by the federal government.
Funds had to be raised largely in the domestic
market because the unpopularity of the Union
cause abroad had practically closed London and
Continental markets. The earlier war issues were
floated through competitive bids, a method which
had been used in 1847 and 1848 in financing the
war with Mexico. Tenders were received from
individuals and banks - all of them from the
East, and most of them from New York, Boston,
and Philadelphia. In Boston, the Merchants Bank
assumed a key role in selling the bonds of the
early loans in New England.
The loan act of 1862 provided for a huge longterm federal borrowing - $500 million at 6 percent. The 20-year bonds were callable in five
years and thus became familiarly known as the
five-twenties. The sale of the five-twenties was an
unprecedented operation, and the mechanics of

handling the loan represent an important step in
the evolution of financial institutions and practices
in the United States. It laid the foundations for
the business of securities underwriting and distribution. Since the issue moved slowly, the Treasury decided to appeal to popular subscription
rather than bargain with banks.

Jay Cooke and the Five-Twenties
In October 1862 the sale of the five-twenties was
entrusted to Jay Cooke & Company, a Philadelphia investment firm specializing in state and government bonds. Cooke was made Government
Loan Sales Agent and was to be paid a commission on sales out of which expenses and commissions to subagents were to be paid. Boston and
New York financiers objected to Cooke's monopoly in handling the government issues, but not
until it became apparent that his methods would
be successful. Cooke had previously worked for
E. W. Clark & Company, a Philadelphia house
with branches in important cities including Boston. With this firm he had acquired experience
through marketing the Mexican War Loans and
Missouri and Illinois state issues, as well as those
of a number of municipalities. The firm had also
been active in railroad finance and the sale of
western lands. All these operations contained elements of modern syndicate procedure, as had
transactions by firms in New England and elsewhere. Associations of firms had purchased securities without assuming joint responsibility in
sales or in management of the sales.
In handling the five-twenties Cooke drew upon
his experience and imagination. He created an
organization for distributing the bonds which put
into association for the first time virtually an the
retail and wholesale security distributors in the
nation, as well as banks and insurance companies.
In the East, a number of the firms were given some
responsibility for setting up and managing the
selling organization in their areas. In Boston,
Spencer, Vila & Company provided very active
support as did Brewster, Sweet & Company, general agents for New England. The bonds, which
were issued in both large and small denominations,
were distributed widely and there were in all some

HISTORY

INVESTMENT

2,500 agents and subagents. As many as 5,000
salesmen were employed at one time and canvassed
the country house by house.
The dimension of the permanent market for investment securities was greatly enlarged by Cooke's
efforts. Cooke was the original "bond salesman,"
the prototype of thousands who now earn a living
selling securities as "registered representatives."
Cooke also made use of widespread advertising.
He distributed bond-promoting hand bills through
stores, railway stations, hotels, inns, and toll
gates. He was also the first American financier
to realize and use the full power of the press in
advertising. The principle has since been applied
by a host of imitators.
Cooke's marketing arrangement involved three
modern features: ( 1 ) association of security houses
under central direction, offering different services
for the purpose of having outlets in every possible
area, large or small and (2) the energetic solicitation of the individual investor and ( 3) maintenance of the price of the bonds during the
distribution by entering the market to buy and sen,
using his own as well as Treasury funds.
Not only did the Civil War place extraordinary
demands on the financial capacity of the Union
Government, but state and local governments also
were required to raise money for war purposes.
Many bond issues were made in order to equip
local regiments and to pay benefits to troops and
veterans. The $47 million raised by the New
England states was about 42 percent of the amount
raised by all northern states. Unique in the history
of Civil War finance was the effectiveness of Boston and Massachusetts in securing funds in the
London money market - some $9 million. In
addition, Massachusetts was the only state to
maintain specie payments on both interest and
principal throughout the war.
Late in the 1860's Jay Cooke & Company and
E.W. Clark & Company brought investment banking still closer to modern underwriting by their
joint purchase of bonds of the Lake Superior and

BANKING

NEW

ENGLAND

Mississippi Railroad. The bonds were also sold
under joint account with joint management.
Cooke is credited with introducing the next step
- the separation of the function of underwriting
from that of distribution of issues in the United
States. This specialization is a feature of many
modern syndicates, and during the period up to
1934 was a feature of virtually all syndicate arrangements. In the purchase and sale of the $2
million bond issue of the Pennsylvania Railroad
in 1870, a group of eight houses was organized to
underwrite the sale; the actual selling was entrusted to five of the eight underwriters headed
by Jay Cooke & Company. Syndicates of this type
were shortly established elsewhere in the nation,
but general use of the syndicate did not materialize until the 1880's.
After the depression of 1873 syndicates began to
shift to specialization of function in underwriting
and wholesaling securities. In sales, the emphasis changed from soliciting the individual investor to soliciting the institution. Commercial
banks began to devote an increasing part of their
resources to the purchase of bonds, largely because of the attractiveness of new security flotations through syndicate participation and because
of the value of association with corporate borrowers in times of good business. In addition to
investment bankers, insurance companies, commercial banks and trust companies, as well as individuals, participated in the syndicates.

were laid. Rail networks were developed through
consolidation, leases, and holding company devices. New coal mines were opened in the East.
New textile mills, shoe factories, packing plants
and iron works were established; and further development was encouraged by new technology
permitting greater specialization. Copper mines
were discovered and developed in upper Michigan
and farther west, and iron ore was developed in
Minnesota. New gold and silver mines were
opened and old ones expanded. There was large
scale building of roads, factories and houses. Technology not only increased production but brought
into existence one new industry after another.
Many new industries grew at the expense of the
old, and profits, instead of flowing into the same
channels year after year, were shifted to new ones.
Toward the end of the century the telephone, the
electric dynamo, and the internal combustion engine appeared, and industries soon developed
around them.

General Economic and
Financial Developments

Although the corporate form had been employed
to an increasing extent since 1800, it was not until
the development of rapid and cheap transportation systems that it became the dominant form
for mercantile and manufacturing enterprises.
During the early years of its history the factory
system did not require large aggregates of capital
- markets were for the most part narrow and
local, transportation inadequate and wealth and
population decentralized. The period after 1873
was marked by a great increase in the number of
industrial corporations, reflecting the insistent pressure of wider markets as transportation improved,
population increased and technological change
made large scale production possible. The growth
of small corporate industrial enterprises laid the
basis for the spectacular development which began
toward the end of the century - the consolidation
and trust era.

During the Civil War and early postwar years the
financial and economic development of the United
States broadened and deepened. Geographic expansion continued to be a dominating element in
American economic development and such expansion naturally increased the area of production.
Railroad building was accelerated as roads linked
the East and West Coasts; and between the war
and 1893 more than 150 thousand miles of track

The national banking system was established,
bringing about a closer federation of the banking
system. The National Bank Act of 1863 also continued "free banking," thus insuring continued
expansion of facilities. It marked the close of the
period of state banking which had failed to provide much in the way of uniformity or distribution
of banking strength. The courts authorized national banks to purchase corporate and municipal

HISTORY

INVESTM EN T

bonds in addition to government obligations. This
authorization carried the implication of power for
further dealing in bonds.

Dcoclopmeni of Investment
Banking Houses
During the 1880's the sale of corporate securities
for industrial concerns was taken over by investment bankers already familiar with U.S. government securities and those of railroads. Small enterprises like the operating telephone companies
continued to raise funds locally but the larger
units turned to financial centers to supplement retained earnings with funds for expansion through
security issues. The investment bankers who met
this need fell into two broad groups. In the first
group were strictly domestic firms, most of which
were located in the older cities on the eastern seaboard. Some, however, began to develop in the
growing West, centering in Chicago and St. Louis.
A second group of houses which came into prominence after 1873 - one or two each in Philadelphia and Boston and several more in New York had important international connections. These
houses began establishing branches abroad; and
many of these relationships have continued to the
present time. The branch in some instances was
an outgrowth of an earlier correspondent relationship. These houses were in a favorable position
to direct the flotation of new securities and became the main channels for capital from abroad.
During the last quarter of the century many houses
began to specialize in serving a particular industry and to develop continuing relationships with
certain companies within those industries. In this
process these houses became central sources of
information about the industries and the firms
with which they were associated. They facilitated
the market for securities of particular companies
and, in many instances, carried limited trading
positions. Specialization of the function of investment firms emerged. Some firms limited their
operations to originating and wholesaling new
issues. They carried out the work of investigation,
formulated the contract for handling the issue and
disposed of the securities to other houses for sale

to the public. Retail firms also developed which
acquired securities for both their own accounts
and for resale. In both functions, the firms tended
to specialize in one type of security - railroads,
municipals or governments.

Further Dcuelopmcnt of
Railroad Finance
As noted earlier, New England. capital and
Boston investment houses had supported the construction and development of a number of railroads not only within the region but in various
parts of the nation. Until about 1850 railroads
were built as short lines and were essentially local
in nature. The roads had been promoted by merchants in the eastern seaboard cities who had
accumulated substantial capital, by local manufacturers at inland points who viewed the road
as extending markets, and by "chief citizens along
the line" who wanted the prestige of connection
with enterprises promoted by the metropolitan
businessmen. After 1855 and up to the Panic of
1873, local roads were frequently brought together
to form through-lines between large cities. By
1873 almost 70 such consolidations, each of
more than 200 miles in length, had been accomplished. In the majority of cases, particularly
after the Civil War, new track was laid to complete unfinished lines going into the consolidation
and to build new sections. Among the consolidations in which New England capital figured prominently were the Burlington & Quincy - merging
the Chicago & Aurora and the Central Military
Tract Railroad - and the Union Pacific serving
the West. New England houses were instrumental
in the consolidation, in 1873, of the New York and.
New Haven and the Hartford and New Haven into
the "New Haven."
After the Panic of 1873, with the growth of competition, further consolidation of the railroads was
undertaken with the specific purpose of developing
railroad systems which would be unified and independent. The objective was not only to main-

BANKING

NEW

ENGLAND

tain but to increase traffic. Boston businessmen
and the Boston investment house of Kidder, Peabody gained control of the Atchison, Topeka and
Santa Fe in 1872, then running 218 miles from
Atchison to Hutchinson, Kansas, extended it to
Pueblo, Colorado, and later connected it with the
Southern Pacific, thus creating a considerable portion of a second transcontinental road. By 1888,
the Santa Fe was an important union of several
rail systems serving an extensive territory in the
Mid and Far West. By 1892, the road was over
9,000 miles in length, one of five systems exceeding 5,000 miles. Systems had become even more
fully developed by 1893 - some 35 roads possessed mileage of more than 1,000 miles. After
1893 and until World War I further consolidation
and substantial reorganization of some of the
railroads was accomplished, eliminating duplicate
facilities.
Between 1880 and 1914 Boston houses participated as members of syndicates not only for the
roads cited above, in which ownership and control was chiefly lodged in their city until the late
1880's, but for the bonds of the Boston Terminal,
Boston and Lowell, Fitchburg, Bangor and Aroostook, Long Island, Baltimore and Ohio, Louisville
and Nash ville, Chicago Junction, Illinois Central,
St. Louis and San Francisco, Great Northern,
Northern Pacific, Utah and Northern, and Oregon
Short Line railroads. Alone, the Boston houses
placed several issues of these securities.

Boston's Early Stock Specialties
Prior to 1880 the market for industrial securities was generally narrow in the principal financial
centers. Moreover, such securities were relatively
few in number, ownership tended to be closely
held and shares were only infrequently offered for
sale to the public. An exception to this pattern
was to be found in the cotton textile industry of
New England. Here, as noted earlier, the corporate form had become prevalent and ownership
was quite widely dispersed. Trading and listing
of these shares on the Boston Stock Exchange had
increased from 17 companies in 1835 to 46 companies in 1855.
Almost all the country's early mining enterprises

HISTORY

INVESTMENT

took the form of proprietorships, with some exceptions in copper and coal mining. During the
1860's the copper resources of the upper Michigan
Peninsula were developed by New England capital. Most famous of the mines were the Calumet
and the Hecla. A number of Boston houses became specialists in copper securities in the 1870's
and 1880's, among them Paine, Webber & Company, Bright, Sears & Company, and Lee, Higginson & Co. A number of new firms were also
formed to deal in coppers and Boston became
the world's chief market for copper mining securities. Over 62 companies were listed on the
Boston Stock Exchange between the late 1860's
and 1880's, many of which had been promoted
and developed with New England capital. Among
these were the Wolverine, Mohawk, Winona,
Phoenix and Michigan Copper companies. Some
of the companies were of substantial size for the
period.
Probably the earliest consolidation in the copper
mining field was that of the Calumet and Hecla
mines in. 1871 with the aid of Lee, Higginson.
Subsequently these mines became extremely profitable. By 1907 one share had returned 90 times
the purchase price in dividends and sold for 110
times cost. The consolidated company was controlled in Boston, and for over 40 years Alexander
Agassiz, discoverer of the deposits, and Quincy
Shaw, another Bostonian, held the majority of the
stock. The corporation maintained its principal
office in Boston until 19 5 5. The original capital
of $1.2 million was supplied by H. L. Higginson,
H. Russell, Quincy Shaw and John Simpkins.
Lee, Higginson became its investment banker and
a central point of information about the company.
The stock was eventually widely held through New
England, with large holdings in Boston.
New England continued its interest in copper
securities, and in the early 1900's was instrumental in financing the Copper Range Consolidated
Company and the Inspiration Consolidated Copper Company. The Copper Range Company
merged Baltic Mining Company, Trimountain
Mining Company, Champlain Copper, Michigan

BANKING

NEW

ENGLAND

Smelting, and the Copper Range Railroad Company. It produced 30 per cent of Michigan's
annual output by 1904. Later the company integrated smelting and manufacturing operations as
well.

Early Applicati(Jfl of the
Holding Company
The trend toward the large American corporation began in the 1880's and accelerated rapidly
after 1897. A great variety of enterprises were
brought forward as offering favorable opportunities for investment. None had greater popular
appeal than those which combined firms within
expanding industries. The demand for capital was
prodigious. In New England this activity was
reflected in a number of fields - utilities, foodstuffs, machinery, textiles, and banking. Many
of the corporations now in the forefront of American business were formed in this period and their
initial development and financing provided by
investment bankers as well as individuals in New
England.
The holding company is characteristically an
American institution, and the first pure holding
company in the utility field - American Bell
Telephone Company, predecessor of the American
Telephone and Telegraph Company - created by
a special Massachusetts charter in 1880, was
financed largely with New England capital. As
late as 1894 about 85 percent of the stockholders
were residents of Massachusetts. The corporation
was empowered to hold stocks in other corporations doing business under telephone patents.
Local or subsidiary corporations were established to develop telephone systems over limited
geographical areas, and the capital was secured
by local subscription. The holding company exercised control through contracts and control of
shares delivered for the use of equipment. Later,
collateral trust bonds were sometimes publicly
offered. In the telephone business, early control
of Bell patents, together with the advantages of

a unified system of country-wide communication,
made the holding company a valuable device for
developing the industry rapidly on a large scale
with relatively small capital outlays. The basic
policy of controlling associated companies as it
exists in the AT&T system today was formulated
in the 1880's by a Bostonian, William Forbes, the
president. Virtually from the outset, the telephone
company used New England houses as investment
bankers in public offerings - Kidder, Peabody;
R. L. Day & Co.; Brewster, Cobb & Estabrook; and
Lee, Higginson. The company early made use of
privileged subscription, a practice still followed
today. Kidder, Peabody has carried out more telephone financing than any other house in the nation.
Early application of the holding company was
also made in the development of the General
Electric Company, which was based on the merging in 1892 of the Thompson-Houston Electric
Company of Lynn, Massachusetts, and the Edison
Electric Company in New York. Lee, Higginson,
which aided in this formation, had been banker to
Thompson-Houston. The consolidation was accomplished by a direct exchange of shares. Thompson-Houston had been one of the earliest industrial
companies to use preferred stock, with the issue
distributed privately by Lee, Higginson. During
the early experimental years, the growing electric
equipment companies found it difficult to market
their generating station and power distribution
equipment. Financial interests were generally
doubtful of the success of the light and power industry and provided little financing. Consequently,
the equipment manufacturers decided to support
their potential customers. This was accomplished
by the use of holding companies, of which the
United Electric Securities Company was one of the
earliest and most successful. It had been created
in 1890 by Thompson-Houston, which used the
securities company as an "assumption company"
to acquire stocks and bonds of the utilities which
the company had received in exchange for its
equipment, thus providing financial assistance to
the operating utility. The holding company then
issued collateral trust bonds which were marketed
publicly. In 1904 the General Electric Company
created a new and larger assumption company
known as the Electrical Securities Corporation.
Later the Electric Bond and Share System was

HISTORY

INVESTMENT

developed by General Electric interests with the
intent of some control of operating utilities.
Arthur Perry, the officer in charge of the bond
department of Thompson-Houston and later General Electric, and two associates in the utility
field, founded the firm of Perry, Coffin and Burr
in 1898. This house, forerunner of the present
Coffin and Burr, Inc., was one of the first to underwrite and market utility issues on a broad scale in
the United States, becoming known as a specialist
in these issues. They were also bankers for the
United Electrical Securities Company. Between
1900 and 1913 the firm underwrote and distributed issues for utilities across the nation. Among
them were the Southern California Edison Company, Portland (Oregon) General Electric Company, Detroit Edison and Consumers Power
Company in Michigan, Fort Worth Power and
Light, Alabama Power and Central Maine Power.
The firm also placed some large Canadian issues.
Early in the 1900's, the house worked closely
with N. W. Harris & Company in Chicago. Having originally interested the Chicago house in
uti1ity financing, Perry, Coffin and Burr shared
many large issues with them. Arthur Perry and
Company, founded in 1915, continued in the utility field as did Coffin and Burr.
Jackson and Curtis were also well known in the
utility field and were bankers for the Electrical
Securities Corporation. Later the two G.E. securities companies were united under continuing
G. E. management and Jackson and Curtis headed
the managing underwriters which included two
New York firms, Bankers Trust Company, and
Kissell, Kinnicut. The firm of Baker, Ayling and
Young of Boston was instrumental in working out
the early financing necessary in developing the
power network in the upper Connecticut River
valley beginning about 1910.
The original Boston firm of Stone & Webster, a
holding company widely known in the utility field,
began operations in 1889. It was the first service
organization to develop in the electric power
industry. In addition to construction work, it
formed a supervisory organization and a financial
advisory service for operating utility companies
during the 1890's. In this latter capacity it employed investment banking houses in Boston to

syndicate and provide for distribution of its clients'
bonds. About 1900 a small department was
formed in the Stone & Webster organization to
market utility common stocks. The department
grew and in 1927 became Stone, Webster &
Blodgett, Inc., through the absorption of Blodgett
& Company, and the head office moved to New
York. This house specialized in syndicates and in
dealing in utility securities. Today it is known as
the Stone & Webster Securities Corporation.

Consolidations and
Recapitalizations
The holding company, because of its ease as a
consolidating device, was used in the formation
of the General Motors Company - one of the
largest and most important consolidations in the
industrial field in the early 1900's. It brought
under centralized direction the manufacture of 12
different makes of automobiles. Shortly after its
formation in 1908 James J. Storrow of Lee, Higginson, as chairman of the Finance Committee of
General Motors Company, was the dominating
factor in recasting the financial structure and developing a plan for improving the operation of the
constituent companies. Associated with Lee, Higginson in this move were two New York houses,
J. & W. Seligman and Company and Kuhn, Loeb.
The H.B. Claflin Company of New York, which
had been the largest dealers in wholesale dry
goods since 1843, was reorganized and expanded in 1890 with the support of Blake Brothers,
a Boston house, in the offering of $3 million of
common stock. An early venture into Canada involved the consolidation in 1893 of four soft coal
producers on Cape Breton - Little Glace Bay,
Gowrie, Caledonia, and International companies
- into the Dominion Coal Company, with transportation and marketing arrangements for New
England and other regions. Kidder, Peabody
offered the $ 1.5 million of securities for the financing.
One of the first large consolidations of banks

B A N K IN G

NEW

EN GLAN D

}

'/.I( .,

/I IR/ f"

lu I t t i D•tc, lb ding to
.,.
,

lllf

mounting to
IJ

"""')

, "', t · C:,,-

I LAP. •

occurred with the merging of eight national banks
in Boston into the National Shawmut Bank in
1898. Kidder, Peabody formed a syndicate to
take over certain assets excluded from the consolidation. The syndicate was familiarly known as
the "Bank Stock Deadwood Syndicate."
Other nationally known corporations were consolidated or merged with the aid of New England
capital and under the sponsorship of Boston
houses. Among these were Chicago Union Stockyards ( 1889), Chicago Junction Railway and
Union Stockyards (reorganization, 1890), American Sugar Refining (1890), Westinghouse (reorganized, ( 1891), P. Lorillard ( 1891 ) , United
Fruit (18 99) , American Writing Paper (1899),
New England Cotton Yarn (1899), U. S. Smelting, Refining and Mining ( 1906), and Massachusetts Gas ( 1909).
Some of the unincorporated companies as well
as the relatively small industrial corporations arranged recapitalizations or offered securities for
public distribution. Others offered new issues for
expansion. Procter & Gamble, a family-owned
partnership, was converted to a corporation in
1890 and offered common and preferred stock and
some bonds to the public under the sponsorship
of Kidder, Peabody in Boston and Morehead, Irwin in Cincinnati. A closely held corporation
founded in Massachusetts in 1780, Walter Baker &
Company, Ltd., a name which became a household
word for chocolate and cocoa preparations,
offered its capital stock for public distribution in
1898 with the support of Lee, Higginson. This

made possible further enlargement of operations.
The following year, Lee, Higginson marketed an
issue of bonds and stocks of the lead and oil paint
company, Harrison Brothers & Company, of
Philadelphia, founded in 1793. In 1899, Jackson
& Curtis and Hornblower & Weeks with Clark,
Dodge in New York underwrote $10 million in
preferred stock for the American Agricultural
Chemical Corporation. Lee, Higginson, R. L.
Day, and Estabrook, separately or in association,
underwrote in 1898 and 1899 $10 million in
bonds for the American Bell Telephone Company
to provide funds for expansion.
Beyond these national industrial names, New
England firms were active in such offerings for
local enterprises as the Seattle City Railway
( 1890), Brockton Street Railway ( 1890), Ellicott
Square Office Building in Buffalo ( 1895), Akron
Waterworks, Lorain & Cleveland Railway ( 1899),
Rockland-Rockport Lime Company ( 1900).

Government Finance
The two most important influences on the market
for United States government securities in the
years following the Civil War were the note circulation privilege carried by government bonds, as
granted by the National Currency Act of 1864,
and the sharp reduction in Treasury debt. Jay
Cooke's specialized dealer operations and the
firms associated with him (principally Fisk &
Hatch, and Vermilye & Company) became relatively less important in government security operations during the era of railroad and industrial
financing after the Civil War. The bulk of trading
in government issues was taken over by brokerage
houses operating through the Ne.w York Stock
Exchange.
During the l 870's the Treasury was mainly involved in debt refunding, and during the 1880's
large budget surpluses made debt retirement operations possible. Federal flotations were important for only a few years in the l 890's. The
continuous outflow of gold required replenishment
of the Treasury's holdings if the country was to
remain on the gold standard, and the Spanish
American War necessitated resort to the market
for new borrowing. The use of government bonds

to secure national bank note circulation was an
important factor in the success of these issues
which were offered for competitive bidding.
After the Civil War the role of the investment
banking house as underwriters of state and municipal securities became formalized as issues
increased in number and volume. State legislatures often passed laws requiring municipalities to
sell their securities at auction rather than privately. This led to the practice, common today,
of specialized firms, either singly or in syndicates,
purchasing new municipal issues and subsequently
selling them at slightly higher prices to the ultimate investors. Massachusetts was one of the
few states to continue the policy of issuing bonds
in support of railroad projects. Some of these
bonds were issued in sterling denominations for
sale on the London market.

The depression which began in 1873 brought
fiscal hardships to many local governments.
Twenty percent of the outstanding municipal
bonds fell into default, some irretrievably, a figure
twice as high as the estimates for the depression
of the 1930's. New England municipalities, however, came through the depression of 1873 with
very few instances of bond defaults. Many New
England cities and towns issued securities in support of railroads through the l 870's. Some of the
earliest investment banking houses to be organized in Boston became specialists in municipal
bonds. Not only did they underwrite the issues
of municipalities in the New England area but
those of governments in other states as well. Issues of several large midwestern cities were
underwritten in Boston before the 1880's, with
commercial banks representing one of the principal
markets for these securities.

Chapter III

The Turn of the 19th Century
No accurate census of investment banking firms
exists for any period in the 1800's. Firms such as
S. & M. Allen & Company, engaged in lotteries,
brokerage and foreign exchange, and E.W. Clark
& Company, active in investment banking operations, are early examples of the largest and most
extensive houses. Partnerships of the two firms
were located in principal cities. They followed a
broad general policy set by the home office and
occasionally acted in unison. These organizations
set the general pattern for later development of
the large investment banking house. There were,
as well, independent firms which confined their
activity largely to one geographical area. A number of these, however, developed ties through cor-

respondent relationships with similar firms in other
American cities and abroad.
The Bankers Magazine in 1854 listed 10 private
banks in Boston, 18 in New York, 20 in Philadelphia and 15 in St. Louis. There were, in addition,
a number of other firms dealing in investments,
foreign exchange and conducting brokerage.
Some of these firms, as well as the private banks,
performed limited investment banking functions.
At this time in Boston, houses like John E. Thayer
& Brother, Blake Brothers & Company and
Henshaw & Ward were typical. Firms were also
established in Providence, Hartford, Springfield,
Portland and other cities on the eastern seaboard.

HISTORY

INVESTM EN T

Some like Brown Brothers & Co., of New York
had offices in most of the principal cities.
The turnover of firms was relatively high and
many went bankrupt during periods of business
recession: Others overextended themselves and
failed as a result of too heavy promotion of enterprises or excessive speculation. Successor houses
were frequently formed; having learned from experience, they were generally more stable than
their predecessors. There currently exist in New
York, Boston and Philadelphia . several houses
which were either founded during the pre-Civil
War period, or trace their origins to that period
through absorption of other firms. A number of
other houses active in Boston today began business
between the early 1860's and 1900.
The 1902 fall edition of the American Bank Reporter carried a listing of 277 bankers and brokers
in New England, in addition to state and national
banks and loan and trust companies. Of these,
218 were domiciled in Boston. Among them were
a number of private banks performing ordinary
commercial operations and several firms dealinsQ
principally in commercial paper. Most of them,
however, may be classed as security houses, including those underwriting houses which bought
securities on their own account and offered them
for sale, and those which performed largely brokerage functions. Almost half of the above number of houses in existence in 1902 were established
before 1885, and within this group some 25 or
more date back to the 1870's. A small nucleus,
as noted before, began operations in the 1850's.
A general classification of the firms by function
is shown below:
Number and Type of Firm Engaged in the
Securities Business in New England, 1902

Functions
Private bankers (only)
Dealers in securities (only)
Private bankers and dealers
Brokers and dealers

Number Number of
N. E. Firms
of
Outside
Boston
Boston
Finns
60
50
13
95

38
4

218

Probably as many as 50 of these firms originated
or underwrote securities. Lee, Higginson & Co.
( 1848), Brewster, Cobb & E tabrook ( 1851),
Tucker, Anthony & Company ( 1862), Kidder,
Peabody & Co. ( 1865), Jackson & Curtis (1879),
F. S. Moseley & Company (1879), R. L. Day &
Co. (1892), Perry, Coffin & Burr (1898), were
among the dominant firms, and provided what was
considered at that time a broad range of services
for the issuer. Severa] commercial banks were
also active as underwriters at this time, including
the Old Colony Trust Co. in Boston, Union Trust
Co. in Springfield, and Worcester Trust Co. in
Worcester. Several of the underwriting firms were
in a position to handle an entire issue of large size;
others could originate and distribute issues of
modest size or participate in the distribution of
larger issues. Some of the latter houses restricted
their operations to municipal securities.

Organization and Functions
of the Houses
Several of the houses began operating partially as
dealers in commercial paper. Commercial paper
dealers assisted in financing various businesses
on a short-term basis through purchase and sale of
negotiable notes, and provided a natural tie to
later underwriting of corporate securities. This
development was gradual, and for many years the
two kinds of business were carried on side by side.
Often the houses later specialized in underwriting;
but even today several continue to conduct both
kinds of business. A few of these houses carried
on a very active letter-of-credit business covering
imports of essential raw materials used in the region - wool, hides, rubber, Egyptian cotton, wood
and pulp. They had branches, representatives, or
close correspondents in the important trading areas
abroad. The returns from this business were usually sufficient to carry the overhead costs of all of
the activities of the firm, making underwriting
activities when successful very profitable.

BANKING

NEW

ENGLAND

The organization of the typical investment banking house was that of a partnership or individual
proprietorship. Traditionally, it was considered
that unlimited liability expressed integrity better
than the limited liability of the corporate form,
and until 1953 membership on the New York
Stock Exchange was denied a firm organized as
a corporation. Many firms assume this position
even today, although the corporate form has gradually become more prevalent in the industry. In
the period from 1900-1930 the development of
affiliated investment banking corporations by commercial banks helped make investors familiar with
the corporate form, and a drift ensued toward corporate organization of investment banking houses.
In the period around 1900, as the investment
banking structure developed, the underwriting of
securities of major corporations, including railroads, was led by eastern houses in New York,
Boston, and Philadelphia. Distribution of securities in the growing Middle West was largely accomplished through the Chicago offices of eastern
houses or through the larger commercial banks
acting in the capacity of dealers. The Chicago
area, after 1900, experienced a substantial growth
in investment banking firms, and one or two of the
large commercial banks also became active in
security dealings. The number of local firms, as
well as Chicago branches of those domiciled in
eastern centers, increased. By 1910 local firms
were originating and distributing securities of midwestern corporations and municipalities in some
volume and taking positions in syndicates centered
in the East for distribution in the Chicago region.
Between 1900 and World War I the population of
firms in both New England and the nation continued to grow. A compilation of houses located
in New England in 1913 provides a general idea
of the investment banking framework, including
both corporate and municipal security _underwriters and houses dealing in both kinds of issues.
In the nation, there were only five houses which
could be considered to have a national distribution system for securities. Two of these, Kidder,
Peabody and Lee, Higginson were domiciled in

Boston. William A. Salomon & Company was in
New York and N. W. Harris and N. W. Halsey &
Co., were in Chicago. J.P. Morgan & Co., Kuhn,
Loeb & Company and William A. Read & Company were primarily underwriters in the New York
market.
1913 Census
of Firms in the Securities Business

Underwriters
Firms with branch offices
Branches in New nglnnd
Branches elsewhere
Branch offices of New York
underwriting firms
Branch offices of underwriting
firms domiciled in Chicago
( and other principal cities)
Additional New England firms
with principal business as
brokers, dealers, etc.

Boston
59
27
27

Elsewhere
in New
England
13
3
7

334

Firms with a limited number of employees and
a single office predominated in all centers; and
much of their business was conducted within regions, both in terms of the securities handled, and
the customers served. In addition to the firms
which were active as underwriters and distributors
there were over 300 firms engaged in some aspect
of the securities business in New England. During
this period, however, branching of firms throughout the nation increased, and the merger of firms
for the purpose of increasing capital or securing
complementary benefits by the combination of
wholesale and retail types of business were not infrequent. New York and Boston firms led other
centers in maintaining branch offices in other states
as well as within their own regions. New York,
Boston and Chicago firms had branches in each of
the other cities - a pattern still followed today.
Of the 24 branches of New York firms in Boston
at this time 16 were considered primarily underwriters and distributors. Unlike their counterparts
today, a number of which are principally sales
outlets, these branch offices possessed considerable autonomy in underwriting and originating
'issues.

Some Boston houses, in order to widen their
spheres of influence and broaden their market ties,

opened branches in New York as early as the
1870's. Kidder, Peabody has maintained offices in
New York since 1872, and Lee, Higginson had,
in effect, a branch in the firm of Chase & Higginson
in 1873. This procedure brought Boston firms
closer to foreign borrowers. A number of these
borrowers seemed to feel that a New York office
was a requisite for firms handling their issues,
some of which made their first appearance in the
early 1900's. Although the capital markets began
to develop further central tendencies, regionalism,
nevertheless, continued to characterize an important segment of the market.
The differentiation of function became sharper in
this period. Several firms in Boston and New York
began to develop a high degree of organization
and some departmentalization in order to increase
the variety of services offered, some of which went
beyond simple assistance in the raising of capital.
Emphasis was also placed on improving distributive facilities. As these organizations increased in
size and extended the locations of their branches,
obtaining a relatively large volume of securities for
distribution became important. Competition became intense for management positions and extensive participation in underwriting. Other houses
fought for top positions in selling syndicates.
Although most of the houses did not attempt to
develop retail business in the modern sense, and
limited their advertising to "the tombstone" ( an
ad which was merely a dignified identification of
the firm by name and address), a few emphasized
their capacity for retail distribution and developed
and trained salesmen who actively sought business
instead of merely depending on "counter men" to

HISTORY

INVESTMENT

service only such customers as approached the
firm. Among these was N. W. Halsey & Co. of
Chicago, predecessor of Halsey, Stuart & Co. In
New England, several houses also began to develop
retail sales. Lee, Higginson is credited with establishing one of the early statistical services, now a
standard feature with the larger houses in the industry serving retail customers. The service grew
out of the firm's pamphlet on railroad securities,
first issued in 1879, which dealt largely with western roads and provided information based on personal investigation of the properties by the partners
and interviews with the management - a procedure which has come to be highly developed by
the analyst of the contemporary house.

Volume and Type of Issues
Offered for New Capital
Measures of growth applicable to underwriting
and new security distribution are difficult to apply.
One such measure, however, is the volume of new
securities offered by houses as syndicate managers;
another is participations in syndicates. The table
below provides data on new securities sponsored
by the region's houses between 1900 and 1915 as
syndicate managers. Several large issues were
offered in 1900: in the railroad field, the largest
were a $2.1 million bond issue of the Boston Elevated Railroad, taken by Kidder, Peabody, and a
$2 million bond issue of the Chicago, Burlington

Corporate Issues for New Capital Offered Entirely by New England
Investment Bankers or Syndicates Headed by Them
(millions of dollars)
Totals
Year

1900
1905
1910

1915

Number
31
34
54
52

Amount
$ 26.1

59.0
96.6
106.0

Railroads & Traction Companies
Number
16
19
18
12

Source: Commercial and Financial Chronicle.

Utilities

Amount

Number

Amount

$ 8.1

$11.6

22.1
33.6
31.6

32.0
34.8
33.5

Industrials
Numher

Amount

8
4

$ 6.3

28.2

)(l

40.9

5.0

Note: Refunding issues and short term debt arc not included.

BANKING

NEW

ENGLAND

& Quincy Railroad, underwritten by Lee, Higginson. Kidder, Peabody also offered a $10 million
bond issue of the American Telephone & Telegraph Company. The size of most issues was relatively small - less than $1 million - and railroad companies dominated the market.
Railways continued to dominate market offerings
in 1905 with 56 per cent of the total number and
10 of the 16 issues of over $1 million falling
within this category. Another large issue was $20
million of bonds for AT&T. Issues of industrials,
although retaining their speculative character, increased in number.
In 1910, for the first time, both utility and industrial securities threatened the dominance of rail
issues. All three types shared fairly equally in a
market which was experiencing considerable expansion. Twenty-five of the new issues were for
$1 million or more, and for the first time a major
portion was for utilities, with railroads and
industrials making up the remainder. Industrials
showed the greatest change with regard to the
number and volume of new issues. This year saw
a growing tendency of firms to offer stocks ( especially preferred) rather than bonds.
The trends evident in 1910 continued in 1915.
More than half of the new issues in 1915 were
over $1 million each, and industrials continued to
take a growing share of the market with an increased volume of common and preferred stock
offerings which later became one of the principal
financing instruments. Throughout the whole
period, Boston firms headed syndicates offering
about $85 million of securities of the AT&T's
associated companies.
During the period from 1900 to 1915 Boston investment bankers also participated in syndicates
headed by firms located in New York or some
other city outside the region. The issues aggregated $4. 8 million in 1900 and by 1915
amounted to $69.5 million. These underwritings

represented the same industrial groups and types
of securities noted above. As issues increased in
size and number over the years, the management
of a syndicate was to an increasing extent shared
with houses outside the region, generally in New
York. Among the issues in which management
positions were shared by houses outside New England were the $4 million bond issue of the Chicago
Junction Railway and Union Stockyards Company
in 1900 offered by Strong, Sturgis & Company of
New York and Lee, Higginson, and the $2.5 million bond issue in 1901 of the St. Louis National
Stock Yards offered by Lee, Higginson in conjunction with the First National Bank of Chicago.
The securities market became still further centralized in New York.
In comparison with the period prior to the 1900's
the scope and variety of offerings was striking, particularly in public utilities, industrials, and government securities. Common and preferred stock
appeared in increased volume, with a number of
features designed to appeal to a wider range of
investors. Bonds also took various forms - as
mortgages, debentures, or income and collateral
trusts. The types of securities accommodated practically any desired division of risk, profits and
control of a business enterprise.

Features of Security Distribution
It was difficult during this period for houses in
any city to accumulate the substantial sums necessary to purchase and carry until time of sale the
larger issues of securities that were appearing on
the market. Very few firms had either the capital
or distributive capacity to handle more than one
type of security. Many distributions took longer
than three months to complete, some as long.
as a year, and a few huge issues as long as two
years. The New York group headed by J. P.
Morgan underwrote the U. S. Steel Corporation
consolidation, which involved securities in excess
of $1 billion and continued from March 1901 to
April 1903. Over half of the common stock involved in the offering, however, floated in the markets for a number of years before reaching final
purchasers. The spreads obtained by the underwriters - i.e., the difference between the price
paid the corporation and that at which it was sold

HIST O R Y

IN V E ST M E N T

~~·.a~
_

~Y:J1!tlTIIYfil"ffi~gyfJ!l!QJ1fil

. I, I ft1/11,.,J;}o1111/1111." li1N 11uo1. t l(th /;; ,1111/.1,1y1,y't/i/,111y'tt111y1n/0,1y
11//lt, ,/It,, 1/1/1. "1111011111 I'll 'll,11, 1/, 1/,, '//. %' /1 //;, lu1111 /11/1//1 1 Ill 11t11 1/ 11711/i,1/11 II/, //'11
1170/011/Ii,/,/,, li1111/
(hw 'l'l101uimnd l)ollnn,,
111 ~,11}1/ 111,11, ,; 1/i,
1
l/,11!,,t//,1/0, 11 /k,/11.,l,J1y1/J1t1y111 /It, y,111 J/m,,/u11. /lt111,/,,w:,'{',f;'4/t1✓/f 1✓11:; t'n//i,-11/111.1/
,,~/#, ,,,,,; t,//, 1d_,/t,11111/11111,/t, 1111✓1,,,1110,,y1dl, .1r1111 lt'11("1~i(lpn,/i¥,tAtlhlr1~1"/,/''1NN111 ,1111/
/Nly11111uli yu11 /,•/Ii,/,,,,,,,' 1/1.t,/tt-(111/./1,// I ,11f11,,,:e1~Jf?~)&J1f,r111NINt1N111/,, ;/,, 111'/
• l/i11 I, 1ul1.1,, /u 1/If, Ir 1,(1.1 1'ti"✓x'l7, .-1.11 01.,1~:>,,)"rf~,.
(Alh/ non/,,.h'k1h111_1!'1
/,;,,,,,,,,, 1,n,/." li11ut'11111. l,/~l'N1t, ~lt'. '/,,/4, ,ffA- l1}~R'??y1111,//,t,, /'1,/r.,, ltw1, 'l,,,o/
f1u1,;/"ro11 N11,I,, 11/,,1,/, h-1'/1/111~,-\'\;.{
1111/,1/,,/, 7.111/tlllt' /;l,jt/111!! ,~ ,jt,;,
11/1, I!.!, "It''~ //i11 .1,111,1/1,.l'j t'i 1/.,~ 111 101.1. /lt1,Ju/t1.1/y1/u,,,;/. li11nN,n1. /,/",111'11111
111111.1,1,1;,,y,;; 1,,11~//II
.,,, 1,,;1111.1/,1l,11.1111;1-1,,,t~1111111J'1N11r/t•1101,-1,~;11,/,/,'
/it(I I/ 1N1/ 1711011·, I/Nlf I, /11,,,/j, 1 /It., "''llilt ,j/It,;;, I,'/,;,, 1/ln1,1.J.111No~ll~n1lr
_
• "/Ito I, 111/ 1(.f,11/111y11II, /, ln111 ~ 111111 ;.,' u,;0/011/1'11 Iii, /, ,,J-11/lli,. r/211, 1111111
, 1,/,jt/io,, 11111I. ./41,'/f:Y,1'111n1y't1011, 111 //;, 11111111_;//lt, /t,/,11,111,/;1,-,h ;;y1.jhr_.1h;1//
I, m/t,Ili11,n,. . .Yli",,,jlt, /,/t .1A,1II/110..!_111/y/.yh,m./,-; ,,y,o/n,,/,w ;;{, l-t,/.:11/
Iii, 'It, 11y't11111 ,,11,/,.,,l,;'tullt,111 II tr 1/t,. //,,~1./l[l''.t 1111/l(J.J;,~Nlto~/,I,~ /1,111.,j,; /,-/11111~
1/t,1/t'lt,,,, h,11.1, ;,,;1.1lr,11l,1111lodt/tnl . /111h 11yol,,1/,,w,Jli,,ll,~y"tl1n1ly/i I/I,
/1r11,n/111. l1//liu I, ;,,/,1111/.111/ /,• //2 ,,., 11.41'/I.I
'
. ?/,1.1 /., 11,l.1/i,,li'/11 /I, , 14y11,,t; ''/ 11.11/tlJ1✓'.J1N1l. 'l11d("' wpm1~_A,1.1.11y1111I/A,,, dyt111h
,.,11/, 1.111//1,111•11 k•/li, 1/
/a/~11/1il1.1nu if/A, /2·.11,6,/41r11l~~/1;, /It, 111,hw/tli',11:1111,/

•

"//

,__

•

Ju ~Utne

1,,0,y1

,l.1.lf:~tr /A;." /4~,,,;,,11-:),l,jih,·'111 ,11111-:-,1,1,

Y,~w,I,

✓

.N,11 A• I,· /111,/,•
/,.i,J ,,'.!,/ lh1.i ,·llty_,,,4;-11 A· I, -~17110/ ly tl.1. ~/,.11,/411/,,,
11111/. '7,111.1110 I, '1/11//A,· 1'f•11jt1·11.1 h111h 111111,.r,,//, I, ,1//,.1
·
. : ..
1/1 /I/ . '/h -1.
·, .1, •
11;/I/II 1/1111~'/.. .f~111.11011
~1/_/1111·. ,, ,/,; /; . ~ /110111.1/
,;;,f '/,/11ly 111 //t1 ya11 (1~ylilt111 . .l/11111/211/,111111/01,lr /11/N
ll1'11y°t1111y /i,-~1 ,·,111.11,/1.'h ,.,

/,,,//r 11

SPECIMEN

BAN KING

NEW

EN GLAN D

to the buyers - were liberal by present standards
because of the greater risk in distribution. Unsold
securities were frequently left in syndicate hands
at the close of the distribution. While the price to
the corporation was fixed, the price at which the
securities were sold to the public sometimes varied
according to market conditions. At times the buying power of the investor brought concessions. Increasingly, it became the practice to invite other
firms to join in moving the issue and sharing the
risk. During the syndicate's life the commercial
banks aided in carrying the securities with loans,
the collateral being securities held by the syndicate.
This was the case in the early telephone bond
issues. The first two American Bell Telephone
Company bond issues, amounting to $5 million,
were offered publicly in 1899. Two New England
houses - Estabrook and R. L. Day, and Vermilye
& Company of New York with close Boston connections were co-originators, and it took the syndicates up to a year to market the bonds.
Beginning in 1900 Kidder, Peabody became one
of the principal houses associated with the telephone company and this relationship continued
even after the issues became so large that, beginning in 1906 with the $150 million bond issue
'
management of a number of AT&T issues was
shared with J. P. Morgan and Kuhn, Loeb in
New York. Kidder, Peabody carried the responsibility for distribution of telephone issues in New
England. In the telephone syndicates which Kidder, Peabody headed in the early 1900's, the house
would usually associate itself with five or six other
New England houses in underwriting the issue.
Baring Brothers & Company in London participated in some of these syndicates. This underwriting association continued in connection with
the New England portions of the issues after the
New York houses became members of the syndicate. Some 30-40 houses, including investment
bankers in Chicago, Houston, and Atlanta,
among other cities, would participate in the final
sale of the issues. Individuals, banks, and insurance companies were also frequently members of
the underwriting group on original terms. After

the Armstrong investigation in 1906, insurance
companies no longer participated in syndicates.
On occasion individuals would participate in the
purchase of bonds to the extent of $500 thousand·
'
and at the dissolution of the syndicate, a number
of these bonds, if no longer wanted, would be redistributed to other buyers.
Most of the early issues of bonds in various fields,
particularly those originated by New England
houses, were distributed to insurance companies,
private trustees who traditionally controlled large
aggregates of property in New England, endowed funds such as those of Harvard College,
and individuals. Commercial banks had become
important buyers of bonds and continued to devote
an increasing portion of their resources to their
purchase. In 1912 the amount of bonds held
roughly equaled paid-in capital. Savings banks,
particularly in Rhode Island and Maine, were
large buyers of utility bonds. This market was
developed in part by Perry, Coffin, and Burr. Since
the mid-l 880's some family fortunes, accumulated
largely through promotions and management of
railroad and industrial enterprises, became trusteemanaged, arid took shares in a variety of enterprises, both new and established, throughout the
nation. For example, when J. M. Forbes withdrew
from active business in the late 1800's his funds
were distributed roughly by thirds among the securities of the Chicago, Burlington & Quincy Railroad,_ Calumet and Hecla Consolidated Copper,
and m western lands. Forbes had maintained a
personal and direct interest in all these enterprises.
Subsequently, J.M. Forbes & Company, as trustee,
gradually redistributed the Forbes fortune in investments in more enterprises. Between 1890
and 1910 Harvard College bought large blocks
of securities originated by the region's houses.
Among them were securities of Walter Baker
cocoa, General Electric, AT&T, Detroit Edison,
Long Island Railroad, United Electrical Securities
Chicago Junction Railway and Union Stockyards:
Such distribution methods sufficed where a limited
number of issues was sold to a limited number of
investors.
A_s income and savings became more widely distributed through income groups, and secondary

markets became better organized and more extensive, the market for securities began to broaden
geographically. Securities markets arose as a means
of raising new capital and have continued as markets for resale of outstanding securities and as
sources for additional funds. Ownership of stocks
by individuals in the early 1900's, however, probably did not exceed one-half million persons and
was generally limited to the higher income groups.

Variety of Industries Served
The New England houses, like those elsewhere,
also served a growing number of regional industries such as textile machinery, machine tool
builders, shoes and leather and rubber goods, as
well as the expanding utility, lighting and gas companies. Among these were such names as Hood
Rubber, Wyman Gordon, Bigelow Sanford Carpet,
and Connecticut Power. New England houses also
offered issues of such other industries as Chevrolet
Motor Car, Union Bag and Paper and New York
Tanning Extract in addition to those of telephone
companies and utilities located in other regions of
the United States. As the telephone companies
developed throughout the nation, Kidder, Peabody
negotiated the sale of independent companies commercial systems and mutual and rural lines to the American Telephone & Telegraph Company .. The house maintained trading positions in
telephone securities and was also instrumental in
getting AT&T stock listed on exchanges abroad.
New England houses also managed the underwriting, in 1912, of the $25 million bond issue for the
Virginian Railway.
The association of New England houses with companies like United Fruit, General Electric and
General Motors continued. The firms underwrote
$8.2 million of United Fruit Company securities
offered between 1908 and 1911, a $10 million
G.E. bond issue in 1912, and a $15 million G.M.
five year note in 1910. Lee, Higginson laid the
foundation for the reorganization in 1916 of General Motors with the now familiar federated divisions as constituents. In all these underwritings,
new capital was supplied for expansion, as well as
for some recasting of financial structures. In several cases the syndicates were shared with New

HISTORY

INVESTMENT

York houses. In 1916 Lee, Higginson, acting in
conjunction with Charles W. Nash, completed the
purchase of the stock of the T. B. Jeffery Company
and set up the Nash Motor Corporation.
After 1895 the reliance on foreign capital to finance industrial growth was materially lessened
but it still played an important part in some flotations. The $20 million issue of AT&T bonds in
1905 and some of the later issues were shared by
Kidder, Peabody with Baring Brothers of London
and at times by Lee, Higginson's London affiliate.
Between 18 90 and 1914 the total volume of domestic securities held abroad increased by only
$1.5 billion, reaching a total of $4.5 billion by the
end of that period. The increase was not as steady
as it had been in past periods, and at times securities held abroad were repatriated. The American
investor was becoming increasingly able to provide
funds for domestic enterprises without European
assistance. Moreover, New England, like New
York, began to export relatively small amounts of
capital during this period. New York and Boston
firms handled a part of the Boer War financing by
the British Exchequer. Kidder, Peabody shared
£30 million of the loan with J. P. Morgan, and
Rothschild and Morgan took an additional £30
million. Foreign industrial flotation began to be
introduced with a small volume of securities from
Latin America, Canada, the Far East and Europe.
In New York and Boston business in foreign securities was later to reach substantial proportions.

Municipal Finance
Even during the first years of this century, it was
evident that the underwriting of state and municipal securities was becoming a specialty within the
investment banking industry. Many of the firms
active in underwriting municipals did not
participate in the corporate market. During this
period the volume of municipal bonds issued in
New England was growing - from $19. 5 million
in 1903 to $31.7 million in 1915-as indeed it
was in every section of the nation. The need for

BAN KING

NEW

EN GLAN D

$2 million was a rarity. In
palities in New England
rating and their issues sold
particularly true of college
better municipal services - street railways, waterworks, schools, and sewage systems - was the
primary impetus for expanding indebtedness.
Most of the bonds issued by New England governmental units were purchased by buyers in the
region, but they were not all underwritten by investment banking houses. Commercial banks, savings banks and insurance companies often purchased municipal issues, particularly those of the
community in which they were located, for their
own or their customers' accounts. Individual investors often purchased small issues. Purchases
for sinking funds, retirement systems, or on behalf
of other municipal or state accounts were fairly
common, often indicating the desire of officials to
avoid putting their securities to the market test.
The changing character of investment banking was
evidenced by the growth of the number of firms
engaged in municipal business during this period
and by the diminishing portion of New England
issues purchased by non-investment banking institutions and individuals - from 25 per cent in
1903 to 10 per cent in 1915. In some cases New
England issues were purchased outside the region,
especially Connecticut municipal issues which were
bought by firms in New York City, a practice
which still continues.
Besides New England municipals, local firms handled such issues from parts of the country as far
away as California and Oregon. Some were the
issues of such large cities as Toledo, Ohio, or St.
Paul, Minnesota. Others were from small towns
such as Patton, Pennsylvania; South Omaha, Nebraska; Lewiston, Idaho; and Central City, West
Virginia. In large measure this procedure reflected
the undeveloped character of financial centers in
other parts of the nation.
Contrary to the practice of more recent years,
purchases of most municipal issues were made
without the formation of a syndicate. The relatively small average size of the issues, which ranged
from $25 thousand to $75 thousand, made that
step unnecessary. An issue totaling as much as

addition, many municienjoyed a high credit
easily. This was and is
and historic towns.

Syndicates were formed, however, to purchase the
larger issues and the securities of issuers whose
credit ratings were not the best. The Boston house
of Fisk & Robinson headed the syndicate formed
to purchase two of the largest municipal issues of
the period. One was a $37 million New York City
issue in 1904 and the other a $16 million Philadelphia issue in 1906.

Municipal Bond Underwriting
( millions of dollars)
1903

/905

1910

1915

Total N. E. Issues
19.5
Underwritten in N. E. 19.4
Underwritten
Outside N. E.
.I
Underwritten by
Mixed Syndicates
Underwritings of Outside
Issues hy Investment
Bankers in N. E.
.7
Outside Issues
Underwritten hy
Mixed Syndicates
.2
Total of All State and
Municipal Issues in
the U.S.
n. a.
New Fngland Portion
of this Total
n. a.
Number of N. E. Investment
Banking Houses which
Underwrote Municipal
Issues
19

22.5
I 9.8

23.5
23.1

31.7

2.3

1.4

n. a.

30.9

3.2

n. a.

324.4

492.6

n. a.

7.2%

8. l';lo

= not available.

Source: The Bond Buyer.

World War I and
U.S. Government Securities
By 1900 trading in U.S. government securities had
shifted from brokerage houses, operating through
the New York Stock Exchange, toward a specialized over-the-counter dealer market. The use of
government bonds to secure public deposits and
circulation provided opportunities for private
banking houses to perform as dealers and supply
the bonds needed by banks. In effect, they supplied a specialized service and volume was great

enough to assure profits. This, then, was the principal function of the dealer in U.S. government
securities during the first 15 years of the 1900's
when the total Treasury debt held steadily at a
level slightly greater than $1 billion.
From 1899 to 1910 the largest dealer in government securities in the United States was the Boston firm of Fisk & Robinson. When the Treasury
offered to bidders $30 million of Panama Canal
bonds in July 1906, most of the issue was awarded
·to Fisk & Robinson, and the firm reoffered the
bonds to banks. From 1911 to 1917 only one
bank, the National City Bank of New York, and
one investment banking house, C. F. Childs &
Company, continued to deal conspicuously
throughout the country in government bonds.
The participation of the United States in World
War I created an unprecedented need for broader
financial markets and laid the foundations for the
government securities market as we know it today. Beginning in 1917 the great volume of
Liberty Loan bonds and Farm Loan bonds provided dealers with an almost unlimited field for
operation in a new type of business of a less technical character than the increasing or decreasing
circulation accounts of the banks.
An active entrant into the U. S. securities market
at this time was Salomon Bros. & Hutzler. The
firm, organized in 1910, developed a business in
short term and other investments suitable for bank
portfolios, as well as stock exchange business. The
over-the-counter market in governments grew at
the expense of exchange trading and by 1925 the
volume of trading exceeded that on the exchange
by several times.
The declaration of war by Germany in the summer of 1914 and the entrance of the United States
in 191 7 placed a mountainous burden upon the
American capital and credit markets and their supporting institutional framework of commercial and
investment banks. The markets were called upon
to finance war supplies of the Allies and later participation by the United States. Some $2 billion
of securities of European nations associated in the
war effort, the most notable of which was the $500

million Anglo-French loan of 1915, were absorbed
in our market. New England houses contributed
substantially to the effort. In addition about $2.3
billions of American securities were repatriated.
The American war loans of 1917- 1 919 approached $7 billion in size and were floated first
with borrowing by certificates of indebtedness and
later funded through Liberty Loans.
The War Finance Corporation, created in 1918,
acted somewhat as a dealer during and immediately after the war as it attempted to provide
stability through a limited program of purchases.
War finance brought about a huge increase in popular ownership of securities. There were over 4
million subscriptions to the First Liberty Loan
and 22 million to the Fourth. Ownership of securities became more widespread. Subsequently,
however, about 18 million subscribers sold their
holdings of Liberty bonds to four million buyers.
Estimates place the number of security holders at
2 per cent of the population before the war and at
about 10 per cent by 1919. The individual purchaser was cultivated intensively by investment
bankers during the 1920's. Large personal gains
from sustained national prosperity made it possible
for persons to move from savings deposit and
insurance policy holdings to direct investment. This
practice grew into a financial habit and had been
encouraged by the advertising of Liberty Bonds
which for the first time taught the general public
some of the terminology of investment.
With the war the United States changed from a
debtor to a creditor nation and for the first time
became an international investor on a large scale.
The demand for funds by domestic industry and
by state and local governments increased tremendously following the war. Investment bankers
and brokers began to use modern advertising on a
large scale - breaking tradition with the "tombstone" - with the intent of extending the number
of direct investors by increasing the public's
knowledge of the financial system. They were
aided in this by increasing numbers of customer
and employee security ownership plans sponsored
by corporations.

33
(f~s

@lb cttolonp l»o l n ,Nills cttompanp.

Chapter IV

Developments of the 20's and 30's
The activities of New England's investment
bankers during the 1920's were influenced by the
national character of the capital and money markets. Many business enterprises which had previously been identified with specific regions became
divisions of national concerns while others sought
more extensive markets in the nation or abroad.
A larger number of investment banking firms established broader distributive facilities and sought
underwritings on a national basis.

Demands cm the Capital Markets
The growing volume and wide variety of demands
on the capital markets during the 1920's taxed the
capacity of the investment banking industry. Prosperity and economic expansion induced great demands by corporations - and especially by public
utilities - for the means to finance fixed capital formation. The assumption by America of the

role of capital exporter forced the investment
banking industry to undertake the flotation of
foreign issues.
The combination of demand by domestic and foreign corporations and governments made necessary
further changes in the investment banking structure and the types of syndicates used. Gross issues
of all types totaled about $6 billion in 1924. A
peak for the decade came in 1929 when total issues
exceeded $8 billion. From 1919 through 1930
nearly 1,800 foreign security issues were floated
in the United States for a gross total of somewhat
under $15 billion. Corporate new money issues
shown in the chart on page 36 constituted the
great bulk of the demand.
During the 1920's utilities dominated the new
issues market, reflecting the large volume of capital
expenditures in these industries, the assets of which
doubled during the decade. For example, fixed

HISTORY

INVESTMENT

lt,1111 ( J,fl'llll l/ll{l Ill,
/,
,T 0r l
l.,/.1'"

.-;7-',

/,tj

( ,;, ,; ,,

r',-/,.,

asset outlays of large companies in the telephone
industry averaged a little under $400 million annually during the period. The electric light and
power industry averaged about $700 million of
expenditures, mainly for central generating stations. Fixed asset expenditures by manufacturing
corporations were also heavy but a substantial
proportion of these funds was supplied from internal sources. Railroad expenditures for additions
and improvements continued to absorb a large
volume of funds.
While annual aggregate demand was growing, the
average size of individual issues also increased.
Before World War I, issues in excess of $1 million

were considered large, but in the middle 1920's
issues of $20 and $25 million were not unusual some were substantially larger. The increasing
volume of capital required by investment bankers
encouraged, among other things, the entry of new
firms and growth of old ones.

Business and Industrial
Consolidations
A substantial part of the proceeds of security
issues in various fields supported a large number
of consolidations. The wave of consolidations in
the late 19th and early part of the 20th centuries
was largely confined to railroads and industrial
enterprises seeking the efficiency of large scale
production and in a few cases dominance in an
industry. In the 1920's consolidations took place

PERCENTAGE DISTRIBUTION OF
DOMESTIC AND FOREIGN CORPORATE SECURITY ISSUES FOR NEW CAPITAL
UNITED STATES. 1920-1930
(MILLIONS OF DOLLARS)

TOTAL

$2,710

$2.336

$3,322

$4,357

$6,053

$4,944

$322

$524

$780

$346

$364

$797

100%
RAILROADS

90
$413

REAL ESTATE

100%

AND FINANCIAL

$411

$1,216

$526

$2,497

$711
70

60
$1,071
✓

50
$1,592

INDUSTRIAL

$1,197

$691

$674

$1,380

--....,_

i"'~

·······-

10
PUBLIC UTILITIES

$382

$726

$1,326

$1,598

$1,811

$2,365

1920

1922

1924

1926

1928

1930

0
YEAR

SOURCE: Stotisticol Abstroct

BANKING

NEW

ENGLAND

35
~MT

.J:lI.iX

xr.r::r,

:XN

1700.-

among financial institutions (particularly banks),
amusement companies, retail stores, food distributors, as well as public utilities. Railroads also
underwent further consolidation and the holding
company became a dominant device in this field.
In New England there were 172 consolidations of
commercial banks between 1921 and 1936- a
record in the region for any 15-year period. A
number of banks were also brought into group
systems through the use of the holding company.
At the end of 1930 there were 10 group systems,
comprising 73 banks, in the region.
Jordan Marsh and C. F. Hovey Company in Boston, nationally known independent stores, as well
as F. N. Joslin in Malden became members of
Allied Stores; and Filene's, also nationally known,
joined the Federated Stores system. Allied and
Federated are two of the "big city" store associations which developed at the end of the 1920's.
First National Stores, which currently operates
the largest grocery chain in New England, developed from a consolidation in 1925 of several long
established food chains - the Ginter Company,
J. T. Connor, and O'Keeffe's, Inc., operating several
hundred stores each. The new corporation comprised about 1,600 neighborhood stores in Massachusetts and Maine. In 1929 the concern acquired
the Mayflower Stores in Rhode Island and Economy Grocery chain in Connecticut. The Ginter
Company and Connor systems had been established in 189 5 and 1897 respectively. The Walter
Baker chocolate firm and Minute Tapioca, both in
Massachusetts, became divisions of the General
Foods Corporation, which was formed to sell a
number of nationally trademarked noncompeting
brands of food products by its various divisions.
In the utility field associations of operating companies were developed through the use of holding
companies. The New England Gas and Electric
System and the New England Power Association
are examples. After the mid-1920's, the holding
company became a dominant device for centralizing the control and management of public utility
operating companies. Many developed a complex

ANO

P' O "-

• A L I:.

. ...

A \.. L

TH C

.. 111: IN O I .. A l.

OROO

t._.

U N tT E O

• .,,._, ,.

T"a... Wt.WI\..,. lo •~it.Ii Jrfl Ir••• "II lla•• ..,._ a•......... \t 1114 Ml,f IM! futt• • J tau,i f lbt I .,., at• •"" •••11••1 ,1n f"t
•11 ......., , .....u,i,, .... .,..,..,at lft bM. llb .11., ,.u,.,, \ti .. \ ... ve., \h• .", .. • n i uu•r tall tulhl I!" O ,~ ......r '-• N to.I~ ,"°'
t-t"9 ,......_ 1;4.,4 b1 \M • t •PIii.M ai '1ol>J1,M"iu.&
lJ ln,r 1J1 an11fau rt'd r, 111 , • t t ,~ bu t k n4 -., 1 ,t qu. lttJ, !.h•t a.-. • •,,.... '-'
..,. .., 1 If h •1. •upu;., ""•"t ~/,tot("},-., .,u,, ..,.., 111 U!: • 1 • 1►• ta.ta• IWl l .,, \,e r•I , td 1( '"""' ~d i, 11 .q
l,o U.• '"°"' 1111,bdll d••·

n. (':, .,

RRAT, Jh..k.
4.IR"lfT & ·ry,
Vlirl.11'•·
T n o a, Y 11n 1·11 o ru • . .. ...

s, .•.•.

ot \',

u.
ruttb•••·

NltlUf ,, .• HI
<
'\4 •• \111.u.u .t tr.Y 4 f·tt.,
W A IT A- t:O A. T lt li! .,-.. ,

,o.•
.,

n-.,.
.

I.CH K"OOO, \\ARD ..
\'01111 B1C0"1·11-.~K
•. H. U O W W. .L L , (h•rc-n•w•, .U, (!,

■,

intercorporate organization involving the issue of
securities of varying form and value.
A number of these combinations were promoted
by investment bankers with the objective of securing economies of production and distribution, or a
position of greater prestige . for individual firms.
In certain consolidations, investment bankers were
advisers and in others they underwrote the whole
issue or acted on a "stand-by" basis, purchasing
any securities of the new firm which were not taken
up by the security holders of the individual firms
involved in the consolidation. In a few cases
combinations were promoted largely for the profit
resulting from the sale of securities.

Increased Variety of Securities
Before 1920 financing of business enterprise had
generally taken the traditional forms of equity and
debt. This continued to be the case but many of
the securities involved developed new features and
a number of variations, such as classes of equities,
preferred stock in series, bonds with warrants and

I
I

stock with rights and warrants. In the early 1920's
the utility operating companies frequently followed
the sale of bonds by issuance of preferred and
common stock. Following the sale of securities of
the operating companies came the nationwide distribution of securities of holding companies in the
form of collateral trust bonds. Some of these holding companies controlled widely scattered enterprises which could not be classed as utilities. Toward the end of the 1920's there was a noticeable
deterioration in quality of their securities issues.
Meanwhile, the real estate construction industry
turned from dependence solely on direct loans
from financial institutions to the issuing of bonds
for individual purchase. Finally, a new security,
the investment trust share, made its appearance in
volume. Investment trusts underwent a rapid development after 1924. Two of the oldest investment trusts still in existence were organized in
Boston - Boston Personal Property Trust ( 1893)
and the trust now named the Colonial Fund
( 1904). The "Boston type" or open end trust is
widely known today.

Changing Syndicate Forms
As financial intermediaries became responsible for
an increased proportion of the total supply of
funds, the concentration of personal savings
became a more powerful force in channeling investable funds. Individuals, however, continued
as the important buyers of bonds and dominant
suppliers of equity money despite the rise of institutions. Personal income taxation was not yet a
strong force and the capital markets were not influenced by tax factors. Estimates of stock ownership provide one measure of individual interest in
stocks. In 1920 there were two million stockholders in the nation; by 1930 the number was
estimated at 10 million. As a consequence, investment bankers felt the need of devising sales machinery capable of reaching great numbers of individuals. In large part, the industry's response was
to expand the network of branch offices. Houses
which were successful distributors began to rely
less and less on the originating house and sought
originations themselves, thus combining the two
functions. As stock financing assumed greater importance during this period, a number of firms

HIST O R Y

IN V E ST M E N T

which had engaged only in brokerage entered
underwriting or became distributors.
The need for an extensive sales network also resulted in a change in the prevalent form of syndication. Before World War I investment bankers
frequently used several syndicates in underwriting
corporate issues. Usually an investment banker
purchased an entire issue directly from an issuer
at a stated price, and that banker alone would sign
the purchase contract; he was known as the "originating banker" or "house of issue." As a second
step, the originator immediately resold the entire
issue to a "purchase syndicate" at an increase in
price. Ordinarily, the originating house became a
member and manager of the purchase syndicate.
As the issues became larger, a third step might be
employed involving a "banking syndicate" which
would buy the securities from the purchase syndicate at still another increase in price, thus spreading risk even more widely. The originating banker
and other members of the purchase group usually
became members of the banking syndicate, with
the originating banker as manager and supervisor
of the final sale of the securities.
Beginning in the 1920's, as a result of the growth
in number and size of security issues, a large number of additional underwriters was required. The
syndicate in which they were included was called
either a "selling syndicate" or a "selling group,"
and at times displaced the banking syndicate.
These selling units differed only in the degree of
liability assumed by the participants. A participant in a selling group was liable only to the extent
of his individual subscription. The group's function was to reach large numbers of buyers; hence,
it was constructed to achieve breadth in salesmen's
contacts, and accordingly included underwriting
houses widely distributed geographically and with
diversified sales capabilities. The size, composition
and liability of the selling unit varied with the size
of the issue, the risk involved and the type of
investor to be reached. The ability of a dealer
to distribute certain kinds of securities was also
a determinant. The problem of keeping the
cost of distribution as low as possible became

BANKING

NEW

ENGLAND

important because of the smaller average size of
individual sales. Throughout the 1917-1933 period, officers and directors of issuing corporations,
as well as other moneyed individuals, on occasion
continued to be made participants on original
terms in the underwriting of a number of issues.
This was the much publicized "gravy train" which
disappeared gradually because of the growth of the
number of underwriting firms and also as a result
of the passage of the Securities Act of 1933.
Periods for distribution became much shorter
than before World War I. Usually the life of the
syndicate was 30-60 days, with a provision to
terminate or extend the period. In practice, they
were much shorter. Risk of carrying unsold issues
diminished and spreads became narrower than before World War I. A uniform offering price to the
public became the general rule. Price stabilization
in the secondary market during the offering period,
a device which some earlier syndicates had used,
became more· common.
The increase in competition lessened the relative
importance of houses dominant in a particular
field before World War I, though they remained
leaders in originating, managing or in taking ranking participations in issues. Dillon, Read & Co.,
and Blair & Company in New York, and Lee,
Higginson and Kidder, Peabody in Boston were
best known for underwriting "across the board"
of industry groups. Kuhn, Loeb and J.P. Morgan
in New York were leaders in railroads, as were
older firms such as Speyer & Co., J. & W. Seligman
and Ladenburg Thalmann. Bonbright & Co. in
New York, Halsey, Stuart & Co. and Harris,
Forbes in Chicago, and Coffin & Burr in Boston
were leaders in public utilities. Lehman Brothers
and Goldman, Sachs & Co. in New York were best
known in the merchandising field.
The growing web of branch offices, the addition
of the selling syndicates, and the standardization
of the basic types of securities, combined to speed
the nationalization of the primary and secondary
markets for securities, especially corporate instruments. These developments led to a substantial
broadening of the capital market. It is difficult to

exaggerate the economic significance of a developing national market. Since very large issues
could be accommodated, a growing number of
corporations were able to utilize technology requiring substantial investment and to become national in scope. Also, an expanding market diminished the variance in prices and knowledge
which characterize local markets. In the process
of economic development, it signified that growing regions could draw upon savings generated in
older regions.

Changes in Structure of Firms
New England, like other parts of the nation, experienced an increase in the number of firms in
the securities business during the 1920's. Although
there were shifts in the population of firms, the
number of houses classified as underwriters which
were domiciled in Boston remained stable. An
increase in the number of underwriters did occur
within the rest of the region. Between the close
of World War I and the late 1920's, more than a
half dozen New England commercial banks established security affiliates. Other banks also participated directly in syndicates.
Mergers of houses continued but the reasons for
merging were more varied - to the desire to increase capital and to secure complementary types
of business was added the necessity of strengthening management. Some brokers took on underwriting and distribution, and underwriters and
distributors added or expanded brokerage. A
number of firms also established branches within
and outside the region by purchasing other
firms and by opening new offices. Some Boston
underwriters maintained branches in all of the
region's principal cities. As the interior of the
nation became important as a market for securities, Boston underwriters opened new offices outside New England. A number of these were
strategically located in the developing regions Midwest, Southwest and Pacific Coast. In most
cases the dual purpose was to improve sales outlets and search for new business. Private wires
and direct lines increased in number, thus linking
offices in various centers more closely together.
This expansion also increased the number of traveling representatives serving these regions.

Some firms moved more slowly than others, continuing to perform their original functions and
handle only the kinds of issues which had become
associated with their names. They consolidated
their positions in the industry, however, became
more clearly departmentalized and extended the
range of services offered the issuers. Some added
statistical and research and trading departments.
New types of specialized knowledge and experience became necessary in dealing with issuers and
developing their financial plans. A number of
houses gradually built staffs of specialists which
increased the firms' effectiveness in competing for
new business, in managing underwritings or in
securing desirable positions in syndicates. New
capital was added to firms through an increase in
the number of active and limited partners.

Census of Firms in the Securities Business
( Selected Years)
19JJ 1922 /929 1933
Boston
Underwriters
Firms with branch offices
Branches in New England
Branches elsewhere

59
27
27
58

45
22
33
43

44
26
62
97

30
18
38
34

Branch offices of New York
underwriting firms

Branch offices of underwriting
firms domiciled in Chicago
(and other principal cities)

Additional firms with principal
business as brokers. dealers,
etc.

334

138

265

254

13
3

28
8

38
12

23
7
16
2

Elsewhere in New England
Underwriters
Firms with branch offices
Branches in New England
Branches elsewhere
Branch offices of New York
underwriting firms

Branch offices of underwriting
firms domiciled in Chicago
(and other principal cities)

Additional firms with principal
business as brokers, dealers,
etc.

171

179

of New York (Chicago and other
principal cities) underwriting
firms with branches in
New England
65

237

269

288

Branch offices outside New England

HISTORY

INVESTM EN T

As the capital and money markets became mote
national in scope during the 1920's, with New
York as their center, a few houses which had long
been domiciled in New England shifted their head
offices to New York City, retaining the Boston
office as a branch. Usually, however, the branch
was given some measure of autonomy and continued its relationship with industrial concerns
domiciled in the region. The shift of the head
offices to New York tended to increase the competitiveness and the volume of the firm's business.
In addition to the firms classified as underwriters
and distributors, which dominated the investment
banking business, there was a large number of
firms engaged in other phases of the securities business as brokers and dealers. Many of these were
individual enterprises or small partnerships with
few employees and little capital invested in the
business. Some of them played a minor part in
distribution of securities, concentrating on retail
sales to a limited customer list, and some conducted only an interfirm business. Between 1913
and 1929 there was sharp fluctuation as firms
entered and withdrew from business according to
chances for profit. Others failed, some merged.
New England cities other than Boston, particularly
Hartford and New Haven, were entered by underwriting firms from outside the region, principally
by New York houses. Their branches offered increased competition to firms domiciled in the
region, not only in searching out new underwritings but more importantly in selling to the growing
group of institutional buyers - insurance companies, banks, trust companies and investment
trusts. Branching by these same firms, as might be
expected, was also carried out aggressively in the
other regions of the nation where the facilities
were less fully developed. There was debate then
as there is now as to whether business could be
developed as satisfactorily by telephone and traveling representatives as by a branch office.
The principal cities in the Mid and Far West began
to develop or refine investment banking facilities

BANKING

NEW

ENGLAND

during the 1920's. Investment bankers in Chicago
increased in number and ability to originate and
manage the distribution of issues; their network of
branch offices also expanded and by 1930 was
nationwide. Growth of the volume of corporate
issues handled by Chicago underwriters outpaced
that of the country as a whole, indicating that competition offered in that city to established eastern
houses was intensifying. This was also true in
other regions as independent houses appeared in
increasing numbers in all major cities.

Commercial Bank Affiliates
Commercial banks had several incentives for competing aggressively for underwritings, and their
activities in this field expanded substantially. Many
functions performed by the commercial banks
were associated quite closely with securities investment and underwriting seemed a natural extension of such departmental services as savings,
corporate trusts and mortgage loans. Banks had
many customers for whom they could originate
securities, and there was a natural market for new
issues among their correspondents. Securities
could also be offered to their customers at a lower
cost than when purchased from another underwriter. A more powerful influence, perhaps, was
the sweeping change in the earning assets of commercial banks. Commercial loans, traditionally
the preferred outlet for commercial banks' funds,
declined steadily as a percentage of total earning
assets after 1920, dropping from 57 per cent of the
portfolios of national banks to approximately 3 5
per cent in 1929. The primary factor in this decline
was the increasing number of businesses, chiefly in
manufacturing, which reinvested earnings and financed expansion through the capital markets.
Under the pressure to find outlets for their funds,
banks turned more and more toward lending on
securities, and partly as a result of the experience
gained in this way, to the employment of funds in
investment banking.
Underwriting was carried on either by a department within the bank or by an affiliated corpora-

tion. The affiliate was usually owned by the stockholders of the commercial bank on a pro rata
basis. The first affiliate on record, the First Securities Company, was organized in 1908 by the
First National Bank of New York. The National
City Bank of New York followed suit in 1911,
establishing the National City Company, and during the ensuing decade banks in the major centers.
as well as some smaller areas, established affiliates.
The number of national and state banks operating directly in the securities business rose
from 262 in 1922 to a peak of 451 in 1929.
Similarly, affiliates rose from 18 in 1922 to 180 in
1930. Among the banks in New England which
formed affiliates in the late teens or early 1920's
were Boston's Old Colony Trust Company, First
National Bank of Boston, National Shawmut
Bank, and Atlantic National Bank.
The increase in the number of larger banks more
extensively and directly involved in underwriting
supplied additional facilities for the expanding volume of securities. Banks and bank affiliates participated as distributors in 3 7 per cent of all bond
issues by dollar volume in 1927 and in about 60
per cent in 1930. The old line houses continued to
be the chief distributors of securities, but the
larger affiliates like Chase, National City and
Guaranty grew in importance and before 1920 had
established branches in Boston.
1

The depression of the early 1930's led some banks
to withdraw from the securities business, and subsequently the Banking Act of 1933 prohibited the
banks from engaging directly or through affiliates
in the corporate securities business. Banks were
forced to choose between investment or deposit
banking, which resulted in dissolution or severance

.(.

///,/

,/,,

of the security affiliates. One of today's well-known
houses, The First Boston Corporation, began as
the security affiliate of a Boston commercial bank.
The distinction between investment and deposit
banking in American law, never hard and fast
prior to 1933, had developed by usage or custom
and the market tended to sharpen it through common practice. As the banking system developed,
deposit banking became more and more a function
of commercial banks; private bankers performed
this function with diminishing frequency and investment bankers abandoned it entirely. The new
legislation of 1933 formalized this specialization.

HISTORY

INVESTM ENT

investment bankers as underwriters of domestic
and foreign corporate and foreign government securities issues during the period 1922 to 1930. The
data reflect both refunding and new money issues.
The first table classifies by type of security the
issues which New England investment bankers
originated, purchased singly or purchased as head
of an underwriting syndicate. The second shows
the volume of issues with which New England investment bankers were associated as members of
underwriting syndicates; they frequently occupied
second or third position in the syndicate.

The tables which follow present the most comprehensive data available on the role of New England

Origination of Corporate and Foreign Securities by New England Investment Bankers, 1922-1930
( millions of dollars)
Type of Securities

1922

1925

1926

1927

1928

Bonds
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign. Government and Private
Total 1.

24
123
82
12
15
256

6
122
28
2

34
85
24
18
16
176

I
69
66
4
92
231

102
9
II

158

13
111
28
1
84
236

122

17
8
10

9
12

8
53
15

71
13
22

Number of Issues
Preferred Stocks
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign
Total 1.

6
36
2

106

12
1

4
14
2

7
8
44

Total Volume of N.E. Originations.
Total United States' Issues
New England as a per cent of
United States
1

1930

310

184

273

216

327

287

3,706

5,529

5.924

8,232

8.507

10,157

6,093

8.4

3.3

4.6

2.6

3.8

2.8

Number of Issues
Total Number N. E. Issues

Number of Issues
Common Stocks
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign
Total 1 •.

1
21
2

1929

Details may not add due to rounding.
Source: For 1922 the Commercial and Financial Chronicle
For the years 1925-30 American Underwriting Houses and Their Issues
For United States totals Statistical Abstract.

BANKING

NEW

ENGLAND

- now part of Schraffts - Estabrook & Co. offered an issue of $500 thousand of preferred stock.
The New Britain Machine Company, now widely
known in the machine tool industry, offered $500
thousand of preferred stock through Warren &
Company of New Haven, and the New Bedford
Gas and Edison Light Co. offered $572 thousand
in bonds through E. H. Rollins & Sons.

Undtnor,iinp; O,·(e;inations
and Participalions
The issues of securities sponsored by houses headquartered in New England ranged from $100
thousand to $50 million and covered a variety of
businesses. The financing included issues of a
number of the region's small and medium as well
as larger businesses. In 1920, for example, a $400
thousand preferred stock issue of the A. C. Gilbert
Company, manufacturers of "Erector" sets and
later of "American Flyer" trains, was offered by
Charles W. Scranton of New Haven and Richter &
Company in Hartford. For Shattuck Chocolates

The larger houses in the region made available to
local enterprises the knowledge and experience
gained from a diversified business and provided
through their branches a broader market for the
secunties. Orpheum Circuit, Inc. offered $3.5
million of common stock through Richardson &
Hill; and General Electric, $15 million of bonds
through Lee, Higginson and J. P. Morgan. Union
Twist Drill of Athol, Massachusetts, manufacturers of drills, taps, reamers and other metal

Corporate and Foreign Securities Offerings in which New England Investment Bankers
Participated as Underwriters, 1922-1930
(millions of dollars)
Type of Securities
Bonds
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign. Government and Private
Total 1.
Preferred Stocks
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign
Total 1•

1922

1925

1926

1927

189
236

10
348

133

120

12
438
127
38

44
770
120
JO

244
859

471
1.414

40
17

66
14

205

121

144

4
242

344

804

823

174

Total United States;' Issues
New England as a per cent of
United States
I

193()

574

321
94

773

84
30
412
1,124

I 15
124
721

I 13
I 16

431
1,475

102
68
193

362

137

8
68
168
3

100

248

820

1,055

935

1,544

1.368

1,331

1,669

3,706

5,529

5,924

8,232

8.507

10.157

6,093

22.l

19.1

15.8

18.8

16.1

13.1

27.4

Details may not add due to rounding.

Source:

/929

Common Stocks
Railroads
Utilities
Industrial & Miscellaneous
Financial & Real Estate
Foreign
Total 1.
Total New England Participations

1928

For 1922 the Commercial and Financial Chronicle
For the years 1925-30 American Underwriting Houses and Their Issues
For United States totals Statistical A bstract,

H IS T O R Y

IN V E S T M E N T

trades equipment, offered $3.1 million of common
stock through Estabrook & Co., Hayden, Stone &
Co., and Parkinson & Burr.
Large companies outside the region were also
financed. In the mid 1920's Coffin & Burr originated or participated in underwriting the issues of
a great number of public utilities scattered over the
United States, including large issues of Texas
Light & Power Company. During this period E. H.
Rollins & Sons did the largest volume of corporate
underwriting of any Boston house and such leading houses as Kidder, Peabody; Lee, Higginson;
Jackson & Curtis; F. S. Moseley & Company;
Bond & Goodwin Inc.; Paine, Webber; Hayden,
Stone; and Hornblower & Weeks were associated
with one or another of a wide variety of issues.
They included such names as Goodyear Tire &
Rubber, Shell Union Oil, Victor Talking Machine,
Marshall Field, Filene's, Gilchrist's, International
Paper Company, S. D. Warren Paper, United
Drug, Canadian Pacific Railroad, National Leather
and Phillips Petroleum.
Bonds predominated among the securities originated by New England houses during the 1920's.
The volume varied greatly from year to year;
trending generally downward from a high of $297
million in 1922 to $122 million in 1929 and
trickled off to nothing during the early 1930's.
Foreign government and domestic public utility
issues were the types of bonds most frequently
offered. These included such large issues as those
of $24, $11 and $41 million of the Province of
Buenos Aires, Argentina, and such small ones as
a $100 thousand issue of the Beaver Valley Water
Company purchased singly by H. M. Payson &
Company. The peak volume of equity issues came
in 1929 when $106 million of preferred and $59
million of common stock were originated. Investment bankers in New England originated in various years during the 1920's between 3 and 10
per cent of the amount of securities issued in the
United States. Since available data are incomplete they understate to some degree the volume
originated in New England.
During this period, New England investment
bankers were more active as members of syndicates formed to underwrite bonds than of those
which purchased equity issues. Only in 1929 did
the dollar volume of equity issues in which they

participated approach the volume of bond offerings. Participations in preferred stock issues were
larger in volume than in issues of common. It is
estimated that in no year during the 1920's did
New England houses participate in more than onequarter of the national volume of corporate and
foreign security issues. The extent of their participations, however, amounted to 60 per cent in
1931, a year of relatively small volume in the nation. In that year, public utility bond issues dominated the new issue market and New England
houses participated in most of them.
Although commercial banks and their security
affiliates originated only moderate amounts of
bond issues during the 1920's, they participated
in a large volume. Peak volume of issues with
which they were associated reached over $537
million in 1927. In 1930 the volume in which
New England banks participated as purchasers
rose to two-thirds of a billion, and remained high
in the following year. National banks were never
permitted to deal in corporate stock but state
banks did originate and participate in a considerable volume of stock issues - chiefly preferred.
The total volume of common and preferred stock
issues in which New England state banks and their
affiliates participated reached $64 million in 1927
and a peak of nearly $124 million in 1930.
From 1934 to mid-1938 the Securities and Exchange Commission collected data on originations
of and purchase group participations in registered
corporate issues by location of underwriting
houses. Over 80 per cent of the $7.6 billion of
securities issued was bonds. Investment bankers
in New England managed between 2 and 3 per
cent of the issues and took purchase group participations amounting to about 5 per cent of the
total. During this period Boston was the third
ranking investment banking center in the country
measured either in terms of the volume of issues
managed or by the total amount of purchase group
participations. Other evidence shows that public
utility bonds was the type of security most commonly underwritten by New England's investment
bankers during the late l 930's.

BANKING

NEW

ENGLAND

World War II continued through the 1950's but in
more fully developed form.

Underwriting of Corporate Issues in Excess
of $1,000,000 Registered with the
Securities and Exchange Commission
from January 1, 1934 to June 30, 1938
(millions of dollars)
A11101111t

of
N11111her

A11101111t

Purchase
Group
Participotions

524
75
33
17
14

6,686.4
401.2
154.6
35.9
32.6

5,861.4
512.8
343.2
129.6
154.4

31.5
5.2

22.8
5.1

43
745

I 91.3
7,583.9

2.2
10.6
383.9
7,583.9

5.8

2.5

5.1

Issues Managed
Location of
Underwriting Firms
New York City
Chicago
Boston
San Francisco
Philadelphia

In contrast to the corporate field, only a small
percentage of the number of municipal issues had
a principal amount of $1 million or more, but
these issues accounted for a substantial part of the
total principal amount of all issues. The market
could be generally described as consisting of a
large number of small issues, and provided business well suited to dealers in the smaller communities. Firms operating in this market fell into
two groups-the relatively small number of houses
which carried on a national business and who bid
for the larger issues; and second, the large number
of small houses with relatively small capital whose
business was mainly the purchase and sale of
many small issues but which participated to some
extent in accounts bidding for the larger issues.

Municipal Underwriting
During the 1920's

In municipal financing, the undivided account was
generally used in the East while the divided
account was frequently used in other sections of
the country and commonly called a "western account." In contrast to corporate underwriting,
there was no selling group. The use of these different types of accounts in the East and West continues today. In both types the participant
obligates himself to purchase a fixed percentage
of the issue. In an undivided account each participant continues to be liable for any unsold balance in the account in proportion to his underwriting interest, whether or not the participant has
already sold more bonds than his original commitment. Each participant receives a concession on
all sales made by him. In a divided account, the
participant's liability is reduced dollar for dollar by
his sales.

Throughout the 1920's the annual volume of
municipal bonds offered in the nation ranged between $1 billion and $1.5 billion. The previous
peak of about $500 million was reached in 1916.
Population increase, rising incomes, and improvement in standards of living led to a demand for
public improvements. The volume of municipals
issued in New England grew less rapidly than in
the nation, however, and remained relatively small,
ranging between $40 million and $70 million. The
general framework of investment banking facilities
for marketing municipals developed. The characteristics of the municipal market established before

Participations in municipal accounts are usually
determined on the basis of the capital resources
of the participating dealers or underwriters,
consideration being given to the selling ability
of each in relation to his participation. The use of
the divided account in the West was probably
attributable to the smaller capital of the local
houses operating in this field. In the East, on the
other hand, widespread use of the undivided account had been characteristic of corporate underwriting, and this tradition has been continued.
This method has advantages in that it puts a premium on the sales ability of a particular firm and

Connecticut
Maine
Massachusetts ( except
Boston)
Rhode Island
New England Total
National Total
New England Total
as a Per Cent of
the National Total

Source: Securities and Exchange Commission. Selected
Statistics 011 Securities and 011 Excliang« M11rAct.1,
Washington, D. C., August 1939.

improves the chance of attracting dealers to make
up the syndicate, especially in the case of the larger
issues handled by eastern houses. It is now used
in the West in handling large issues, particularly
by bank underwriters.
Although investment banking facilities in western
parts of the nation expanded in the 1920's with
the rapid rise in the number and volume of issues,
they were still inadequate to meet the demands.
New England houses accordingly underwrote a
number of extra-regional issues as did firms
in other eastern centers. In addition, the houses
participated in syndicates with firms from outside
the region in underwriting a growing volume of
issues originated in various sections of the nation.
As the larger cities in the Mid and Far West became financial centers in their own right during
the latter part of the l 920's, local issues we~e
underwritten for the most part by local investment
bankers, and activities of outside houses were limited to participation in syndicates formed to underwrite the large state and city issues - "general
market names" - of a given region.

Marketing Municipal Issues
The number of municipal underwriters domiciled
in New England in the early 1920's was smaller
than before the war, but the houses, generally
because of merger, were larger in capital size.
Several of the firms, including R. L. Day & Co.,
Merrill Oldham & Company, Edmunds Brothers,
E. H. Rollins & Sons and Estabrook & Co.
were active in the national market, regularly
taking major positions in syndicates formed
to handle large issues from various regions. The
local New England business was well divided
among the rest of the houses. Except for one or
two firms, all 27 of the New England houses
underwriting municipals in the early 1920's were
located in Boston. By the mid-20's, however,
firms doing a municipal business were established
in other large cities in the region. There were eight
houses located in Hartford or New Haven and a
few firms in Portland and Providence which specialized in handling municipals issued in their own
states. About 15 per cent of the total New England
issues was underwritten in New York. As branch
offices of New York houses increased in number

HIST O R Y

IN V E ST M E N T

in New England, they became more important as
underwriters of New England issues. In the early
l 930's these firms underwrote about one-fifth of
the total dollar volume of the New England municipals issued. New York firms also joined with
New Ensland
firms to underwrite the region's
b
large issues. By 1933 more than one-third of the
New England issues were purchased by syndicates
of this kind, which had been almost unknown before World War I. This vigorous entry of New
York firms into the New England market partly
reflects the developing financial and trade relationships between New York and southern Connecticut, as well as the increasing centralization of the
securities market in New York City. Some New
England issues sold better outside the area and the
nationwide distributive facilities of New York
firms made them logical choices for participation
in underwriting syndicates.
New England commercial banks and security affiliates offered increasing competition to investment
banking firms in marketing regional issues during
the late 1920's, and became an even more important market influence in the early 1930's.
Investment banking houses felt the i~itial impact
of the depression more acutely than the commercial banks and many of the houses were forced to
retreat from overextended positions and were unable to continue to underwrite. Some houses
failed. In effect, banks and their affiliates came to
the aid of the units of local government, and
underwrote about half the amount of the issues.
As much as 20 per cent of the amount was bought
outright by the banks and affiliates.

Municipals in the Depression
The 1930's depression sharply reduced local government revenues and many communities which
had issued a large number of bonds in previous
years were forced to default. By 1933 about $200
million of municipal securities were in default, and
3,238 of the nation's political subdivisions reported bonds in default on November 1, 1935 the largest number for any of the depression years.

BANKIN G

NEW

EN GLAND

issues; and about three-fifths were purchased by
syndicates which included members from both
New England and New York City. A few New
England issues were purchased entirely by New
York City firms. Underwriters in New England
frequently were members of syndicates formed to
purchase the large issues originated in various
parts of the country but seldom acted singly in the
purchase of an entire issue.

New England states and municipal governments
experienced less than 10 defaults, a record superior to that of other regions and the result in
part of conservative debt ratios and the fact that
many expenditures had been financed from general
revenues or with the aid of specific taxes. The
region reported few emergency loans to liquidate
tax titles and similar types of relief by legislative
action. New England governments were thus able
to issue new bonds in a period when those of other
areas could not. In 1932 the volume of new issues
in the region reached a record peak while the
national total was at its lowest point for the decade.
By the close of the 1930's investment bankers regained strength in the New England municipal
market and commercial bank participation was reduced to pre-depression proportions.

Reg11lation of the Investrnent
Banking Industry
Formal regulation of the securities business did not
begin in the United States until shortly before
World War I. Until then the sale of securities was
conducted for the most part without restraint.
Legal remedy was available in the case of fraud or
misrepresentation but "let the buyer beware" was
the generally accepted basis of procedure. The
increasing investor class and the rising volume of
securities offered led to a popular demand for
protection in the pre-World War I period and
again after 1929. The first response was a series
of state laws popularly called "blue sky" - a

By the opening of World War II municipal
underwriting in New England was following a
fairly distinct pattern. New England underwriters
bought about one-quarter of the New England

Municipal Bond Underwriting
( millions of dollars)

Total N. E. Issues
Underwritten in N. E.
Underwritten Outside N. E.
Underwritten by Mixed
Syndicates
Underwritings of Outside Issues hy
Investment Bankers in N. E.
Outside Issues Underwritten by
Mixed Syndicates
Total of All State and Municipal
Issues in the U. S.
New England Portion of
this Total
Number of N. E. Investment
Banking Houses which
Underwrote Municipal Issues
Source: The Bond Buyer.

1920

1925

1930

1933

1940

43.2
32.4
7.0

59.8
42.8
6.8

76.7
54.2
14.5

57.7
17.4
10.8

55.9
14.6
7.9

3.8

10.2

7.9

29.5

33.4

6.0

1.1

0.6

0.2

0.1

40.2

60.8

61.3

40.2

419.0

773.7

1,404.7

1,382.9

1,127.6

1,497.7

5.6%

4.3%

5.5%

5.lo/o

3.7o/o

term based on a legislator's remark that some companies sought to "capitalize the blue sky."
Kansas, in 1911, was the first state to require a
comprehensive licensing system applicable to securities and persons engaged in the securities business, and its legislation profoundly effected the
development of blue sky laws elsewhere. As a
result of the success of this act, 36 other states
adopted similar legislation in the next nine years,
though most was passed in 1912 and 1913. These
statutes were of two main types - the punitive or
"fraud" type, which provided penalties for fraud
after securities had been sold, and the regulatory
type which attempted to prevent sale of fraudulent
securities. Kansas and the many states which followed its lead combined the English theory of full
disclosure with the doctrine that an administrative
agency should pass upon the soundness of a proposed issue. These laws also provided for careful
examination of the business affairs of issuers before the granting of registration or licenses so-called "registrations by qualification." Securities of railroads and public utilities were exempt
from these laws as they were reviewed by the
Interstate Commerce Commission and by state
utility commissions. Government securities of all
types were also excluded.
During the 1920's, the period of heavy investment
and speculation in securities, progress was made
toward agreement on uniform types of state securities legislation and toward developing standard
financial and administrative procedures. This
tended to benefit both issuers and dealers, as well
as prevent and punish fraud. Every state except
Nevada adopted some type of securities legislation.
During the early depression, many state legislatures and regulatory commissions tightened their
laws and administration. However, the system of
state regulation proved unable to overcome its
basic defects - lack of jurisdiction over interstate
trading in securities, lack of facilities for maintaining adequate vigilance and failure to make
generally available the information obtained
from companies and dealers in their applications.
The popular demand for additional protection
against the sale of fraudulent securites led inevi-

tably to federal legislation affecting the investment
banking industry. Prior to this, however, many
security houses had suggested federal legislation
as a means of avoiding the conflicting requirements of the state statutes when business was done
under several jurisdictions.
Before 1933, the federal government, under an
Act of 1909, had exercised limited control over
interstate sales of securities by prohibiting fraudulent use of the mails, and by controlling railroad
issues through the I.C.C.
Beginning in 1933, Congress passed several acts
affecting the investment banking industry directly
- the Securities Act of 1933, the Banking Act
of 1933, the Securities and Exchange Act of
1934, the Public Utility Holding Company Act
of 1935, the Maloney Act of 1938, the Trust
Indenture Act of 1939, the Investment Company
Act of 1940 and the Investment Advisers Act of
1940. Through these acts the Securities and Exchange Commission was established and provided
with broad powers for supervising the securities
business. The connections between commercial
banks and their security affiliates were dissolved,
commercial banks were prohibited from underwriting or dealing in corporate securities and the
size and structure of public utility holding companies were limited and defined. In 1940, utility
underwriting was brought under S.E.C. control,
leading eventually to public competitive bidding
in most utility underwritings. The Maloney Act
authorized the establishment of the National Association of Security Dealers with rules of fair practice approved by the S.E.C.
The Securities Act of 1933, as amended, does not
attempt either to prevent the sale of speculative
securities or judge the merits of particular issues;
it simply provides that complete and accurate information regarding securities offered for sale in
interstate commerce be made· available to prospective purchasers, and that no fraud be practiced
in such sales. Since fraud is unlikely when complete disclosure is made, the first of these two
requirements is of primary importance in securities
market control.

TH IS C t ... llF IC A Tf 15 T~ .a. N $ f ,_,u,e L e IN THE C IT Y 0 ,- N C W YO R K O P , ....

li1is1slu~irtilr at--- ----

--t I

v s s F. s

11 1

H"f

(:; ITY o r- C H IC A. C O

----- ---------ai11u1nf

1 c i

ruLLY PAIO ANO NON ASS[SSABL[ SH ... RES CF TH[ PAR VALUE CF rivr COLLARS

.s,;1

EACH CF THE CCM.-ON !HCC< or

Chapter V

Financing Since World War II
The postwar period, except during its brief recessions, witnessed security flotations increasing rapidly in volume, exceeding by a considerable margin
the heavy demands of the 1920's. This was particulary so during the boom of 1955-57. Capital was
demanded by a broad range of new industries
such as plastics, synthetic textiles, electronics and
automated equipment, as well as by established
manufacturers, utilities, service industries and
financial institutions. New plants were built, older
establishments modernized, and machinery purchased in record volume. Productivity improved
as many processes were automated and capital
investment per worker increased. Air transportation developed rapidly, railroad rolling stock was
modernized, and a network of limited access highways was constructed.

motels and restaurants. Many industrial concerns
merged to provide diversification of product lines.
Corporations expanded or diversified through
acquisition of independently owned local or regional manufacturing, distributing or service organizations. Increasingly, local and regional
enterprises became divisions of national concerns.
The period also brought forth a new wave of
bank mergers and consolidations, many of which
also required the services of investment bankers.
These involved substantially larger amounts of
assets although fewer numbers of banks than during the 1920's. The movement was more pervasive
and embraced banks in both the largest and smallest cities. Branch banking systems were also
developed in many regions, contributing to a more
centralized financial system.

The period produced a number of consolidations
and large scale chain enterprises such as hotels,

The pegging of interest rates during the war and
early postwar period induced refunding of issues

on a large scale. After flexibility in credit policy
was restored with the Treasury-Federal Reserve
Accord of 19 51, refundings also appeared in volume during periods of monetary ease in 1954 and
19 5 8. These offerings were thus added to new
corporate issues, increasing the total volume.
Privileged subscriptions, secondary distributions
and the initial public marketing of stock by large
established concerns, such as Ford Motor Company, increased, as did the stock of smaller, closely
held corporations. In the public sector, there were
-mounting demands for capital by the federal government and by states and municipalities.

National Character
of the Capital Market
During the period after World War II, the national character of the long term capital market
centered in New v·ork City underwent further
refinement. This development is a product of
slow evolution since the mid-1880's when markets

H IS T O R Y

IN V E S T M E N T

were distinctly local or regional, differed markedly
in size, and had relatively few connecting links.
The influence on market development of the nonbank financial intermediaries - life and casualty
insurance companies, investment trusts, pension
funds, personal trusts, and savings institutions has been striking, because of both their sources
of funds and the type of securities they purchased. Specialization has developed to meet the
needs of large classes of borrowers and lenders
and transactions are now accomplished more
rapidly and at low cost. These changes accompanied the improvements in communications systems, knowledge of markets and new provisions
for the transfer of funds and other money market
investments. The investment banking industry
serves as one of the unifying forces in the national
capital market.

PERCENTAGE DISTRIBUTION OF
DOMESTIC AND FOREIGN CORPORATE SECURITY ISSUES FOR NEW CAPITAL
'UNITED STATES. 1950-1959
(MILLIONS OF DOLLARS)

_________
.....,_
$4.989
TOTAL

$8,717

100%
TRANS PORT A TION

$609

$10.385

$10.823

$501

$694

$778

$9,392

100%

$942

---------+---+----l---+----+---4---1----+----+--1----l---+---90
$612

COMMERCIAL AND

$474

MISCELLANEOUS

$768

$7.490

$831

$682

$867

$812

$448

---------+----+----1---,1,,--4----+---1---4---+--1----l-~-+---80
$1,801
$1,014
REAL ESTATE

$788

$639

AND FINANCIAL

$1,815

----------+---+-----f--+---+--......t,,--.J-----+----+--.J----+---+---70

----------+---+-----f--+---+----+---i-----+----+---1----1---+---60

----------+---+-----f--+---+----+---1-----+----+--.J----+----t---50

MANUFACTURING

$1,026

$3,713

$2,044

$3,336

$3,265

1950

1952

1954

1956

1958

$1,941

10
0

YE,

YEAR

SOURCE: Securities and Exchonqe Commission

BA N K IN G

NE W

EN G LA N D

Approximately 3,500 firms are now engaged in
various branches of the securities business in the
United States. Among these are 100 firms which
play the leading role in originating and distributing
new security issues and in making markets for unlisted securities. The various houses in this group
regularly appear as managers, co-managers or
major- participants in large corporate and municipal offerings. At times, they bring large numbers
of selected dealers in various parts of the country
into the final placing of the issue.
Ranked in terms of capital, 9 of the first 10 of
these houses, with capital ranging from $21 to $55
million, are located in New York City, as are a
large number of the other 100 leaders. Approximately 20 firms with sufficient capital and reputation to originate and distribute securities and with
staff facilities to conduct related business, are
found in Chicago, San Francisco, Boston and
Philadelphia. The rest of the leading firms are
located in the principal cities of every region of
the country. Most of the New York firms are also
closely linked to the principal cities in the nation
through branches, correspondents and direct wires.
The firms outside, in turn, have similar direct links
with New York and particularly with other cities
in their regions. All facilities for trading the great
bulk of corporate, federal government, and many
municipal securities have come to be based in New
York, both in respect to quotation and market
breadth.

Links Among Markets
To the extent that regional markets remain, they
have become quite closely tied to the national
market, partly through the interrelationships
which exist within particular investment banking
firms. The fact that most houses have important
interests in several markets assures a close relationship between the actual developments in local
or regional and national markets. Shifting investor
preferences among corporate bonds of differing
quality and yields and among corporates and municipals or governments help to tie markets to-

gether. There is also a direct link between the
house, as borrower in carrying its inventory, and
the short term money market. Investment banking
facilities in the nation's principal cities and those
in smaller towns thus tend to integrate the facilities
of the national market and provide connections
between not only national, regional and local
markets but among different kinds of securities.
A number of the larger firms deal in United States
and foreign government securities, appear in selling groups formed by fiscal agents of the Federal
Intermediate Credit Banks and the Federal Home
Loan Bank, make markets in agency issues and
participate in municipal underwriting. Some are
among the leading dealers in the over-the-counter
market and many have memberships on the New
York or other exchanges. A few also deal in acceptances and commercial paper. Whether or not
the firms participate in other markets, all are
obliged to consider developments in these markets
in dealing with customers who move from one
market to another.
Of the total net debt in the nation, one third is
composed of obligations of federal, state and local
governments. These securities are exchanged in
national markets at virtually uniform prices for a
given security. The widespread ownership and
convenient liquidity of government securities supply a common denominator for the entire credit
system. Federal legislation creating lending authorities, loan guarantee programs and deposit
insurance has also contributed a unifying influence
in credit markets. For individual borrowers and
lenders, there are relatively few areas in which
access to markets is indirect. Rate relationships in
the money market are more consistent and the
differentials in rates have substantially diminished.
All forms of domestic financing have become
sensitive, whether preponderantly or marginally, to
the influences of a national credit market.
Changes in the channels of supply of loanable
funds have been a major factor promoting the
national fluidity of credit. The number of investors who place their funds directly is relatively
smaller. More and more reliance has been placed
on major financial intermediaries. These institutions accumulate the great bulk of individual liquid
savings and place them in broad regional or national pools. Each of the major types of inter-

. .......................... ....... ..................

HISTORY

INVESTMENT

~OllWIC'II ,\.ND HO"i'l'ON HAll,•llOAU,

;llf

11···

lln• t

~11,

1 1111,
;

h .,

\y.w

dnllM1 pfr
tu, mav h!,,! lq;t1ll't· 111,tik 1lwn•nH. awl

httrl'
lo

i,f Ju,·1,rJHlruhon u111{ du• B~· lo1n\H 1,t th,• f'ompany,
,I tlu

,1·rt1li1·11t•· lo

duh

tlw 'I'rcasun-r hy the

c!;t\:

,,,

lwh

,u·,,,

""h,1r•~

t ln-

t'1,w l11 j"li

JUHi

nn·

e-n
.111•

1•,,111,

1r,,11~1n,1hlt

Ill flu

,.•,1r

Ill

\\l11, h
l\t1lq1•r1
111 •4!

111

1111 tlw

oi uur I .,,rd !"Li
1
/ ,,

".,,,~r-,f~r, .......

l'11,I(;.,,,.
✓

,' ~/.,,/, ,,,. --.
,..

NHI ~,,~,,,.

.:.J,,",
/,

,, 'J ,,., . ,,..

re,

H1tth11r11.HI

IJ.it1 .J ,t \',,,,· \ ork 1hi11

....... ..... ....

l.o~f~)~ U\1 Ho\1,(

0,,

,dl~rtw\

Sh.i t'"-

\:w'I\Hlt,.

"-t•Ji'"IHH' lll~

11rnwl1·1

~ 11r

1lw IJ.v.:.,,o~.

t1!

/ Va .. , / 7,,..,,,

/PJ,., ~ • .,/,.,/

d ~t,wk

,qnl

" h:i,; J,ri·n p,wl
: to

/_/'

lt ltno\Un, 'l'lmt nt/ec<1..-~

.,, J'ro('rlt'!111

}

,,,

,,f,111

)

'"' ,..

mediary is tied more closely than the smaller saver
to the national credit market. Investment action
of institutions is directed by informed persons who
are sensitive to developing profit opportunities
within the capital market; some of these institutions will switch from bonds to mortgages as
yields become more attractive in one market as
compared with another. They are the leading participants in evolving secondary markets for private
credit instruments. Along with their wide reach
of investment commitments, these institutions
marshall savings over a considerable area by
means of aggressive sales and promotional efforts.
As a result, even the most geographically restricted
of these institutions, savings and loan associations,
are influenced by lending practices followed by
their national competitors.
Long term debt held by all financial institutions,
including public trust funds, increased from about
$40 billion in 1920 to $250 billion in 1945 and
to $540 billion in 1959. During the 1920-1959
period, the proportion of long term debt, public
and private, held by these institutions rose from
49 to 78 per cent. Close to half of the long term
debt not held by institutions, $48 billion, is represented by individual holdings of savings bonds.
Much of the remainder consists of public and
private marketable securities held by individuals.
Life insurance companies, with $94 billion of reserve funds, constitute the largest group of investing agents and are most importantly involved in
redistributing the savings throughout the nation.
In recent years, private and state and local government pension funds have become an increasingly
important part of institutionalized savings.

Financial Intermediaries
in New England
New England is the home of a large number of
institutional investors whose assets and inflows of
funds represent major fractions of the national
totals held by such institutional groups. All forms
of these institutions in the region have a long history extending back in some cases to the early
1800's. Their recent growth has paralleled that in
the nation. This explains in part the dominance
of New England investment banking houses in past
periods, and in part the current position of the
houses and branches domiciled in the region as a
significant part of the national market.
The insurance firms headquartered in the region,
the life, fire, marine and casualty groups, account
for about a fifth of the assets of these institutions
in the nation. The assets of the region's investment trusts represent over 31 per cent of the
total assets of the open end trusts. The region's
mutual savings banks hold 27 per cent of all mutual savings bank deposits, and personal trusts and
agencies administered by the commercial banks
approach 12 per cent of such property in the nation. In addition, about 5 per cent of both total
bank administered and state and local government
pension funds are located in New England. Boston
also continues to be the home of a number of
private or "Boston Trustees" estimated by the
investment community to administer about $1
billion of trust assets.

The Individual Investor
Although the relative importance of institutional
ownership of bonds and stocks has increased, with
investment trusts taking about half of the net new
stock issues in the last 5 years, individuals
remain the most important holders of equities. At
the end of 1959, individuals owned directly 70
per cent of the corporate stock not owned by
another corporation. These holdings were valued
at $210 billion. Personal trust funds administered
by banks held another 14 per cent and nonprofit

BANKING

NEW

ENGLAND

organizations, 6 per cent. The remaining 10 per
cent was held by financial institutions, including
investment companies, insurance companies, noninsured pension funds and mutual savings banks.
The number of stockholders in 1960 was approximately 13 million, or one adult in eight. This is
a larger number than at any previous time; but
the ratio is probably no higher than in 1930 when
there were an estimated 10 million individual
stockholders. The distribution, by size of holding, of specific stock issues became less concentrated during the last 10 years. In 1957 at least 40
per cent of dividends paid to individuals was received by those in the top 1 per cent of income
bracket, while 60 per cent was received by those
in the top 10 per cent bra~ket.

Stock Ownership in New England
New England continues to be a region where personal incomes and individual liquid asset holdings
are high in comparison with the national averages.
The individual purchaser accounts for an important
portion of funds which flow into fixed capital
throughout the nation, and is an important factor
to be considered by investment banking houses
when planning office location.
In 1959 the New York Stock Exchange estimated
that slightly over one million individual stockholders live in New England. Over 10 per cent of
the total population in New England held stock
as compared with 7 per cent in the United States
as a whole. In the New York, New Jersey and
Pennsylvania area 10.5 per cent were stockholders,
the only other region where this figure exceeded
8.5 per cent. Since 1956 the number of New
England stockholders rose only 7 per cent while
the total in the United States rose 45 per cent. On
the other hand, the fraction of the region's residents
who own stock rose from 9.9 per cent to 10.4 per
cent. The recent spread of stock ownership in
New England has been less than in other regions
because it had proceeded farther here originally.
Per capita dividend receipts in New England are

higher than the national average by more than 50
per cent, suggesting that per capita ownership of
stock is higher also. New England continues to be
an important individual market, not only for outstanding securities but for new issues as well.

The Currently Active
Individual Investor
In late 1959 the house of Merrill Lynch, Pierce,
Fenner & Smith, Inc. gathered information from
their active account holders by means of a mail
questionnaire. The questionnaire was sent to all
persons for whom the firm was holding cash or
securities. Approximately 140,000 replies were
received, 5,000 of them from New England. The
accompanying tables show separately the characteristics of the respondents from New England and
from the entire nation.
Analysis of these tables suggests that in New England the firm's customers are slightly younger than
in the nation generally, perhaps because the Boston offices have a shorter history of activity than
offices elsewhere. The tendencies for New England customers to report smaller portfolios than
nationally, and to have lower incomes, are probably explained by the greater frequency of younger
investors among the firm's customers in the region.
The occupational characteristics of the customers
are quite similar to the national group. To correct
for the different age and income patterns, separate
comparisons of the New England investor and the
national investor were made for each age and income group as to value of security holdings and
types of securities held. Corresponding comparisons were made in each occupation group. They
reveal several noticeable differences.
In most age, income and occupation groups, the
value of the securities owned by active New England investors is comparable to the value of the
securities owned by active investors throughout
the nation. There is some indication that active
investors in the region in the 21 to 40 years of age
group have larger portfolios than young investors
elsewhere. New England investors over 60, on the
other hand, reported comparatively smaller portfolios. It should be remembered that regardless
of location, value of security holdings tends to

HIST O R Y

IN V E ST M E N T

52
A Profile of the Currently Active Investor

New England and the United States

Per Cent of Investors
United States

New England

37
45
18

46
40

100

56
31
13

62
28

100

45
23
9
8

Age
Under 40
40-60
Over 60

Annual Income
Under $10,000
$ I 0,000-$20,000
Over $20,000

Occupation
Salaried Employee
Professional
Proprietor
Housewife
Retired
Other

Value of Security Holdings
Under $10,000
$ 10,000-$50,000
Over $50,000

Period of Earliest Security
Purchase
1950-1959
1940-1949
pre 1940

21
9

7
II

100

45
35
20

49
34
17

100

19
20

66
18
16

100

32
6

12
12
97
17

Percentage of Investors
Owning Securities by Type
U. S. Government Bonds
Municipal Bonds
Corporate Bonds
Preferred Stock
Common Stock
Mutual Funds

12
98
17

rise with age. Housewives in the region tend to
hold smaller portfolios than housewives elsewhere.
There is no noticeable regional difference in value
of portfolio size among the other occupational
groups and none among the various income
groups. Figures on security ownership generally
show that the value of securities held tends to
increase as income increases. In this respect New
England is no exception.

Practically every investor having an account with
this firm has common stock as a part of his
portfolio. In all areas the popularity of preferred stock, corporate bonds and municipal bonds
increased with age and income, being most popular with retired persons. However, New England
investors in almost all age, income and occupation
groups show a stronger tendency to include corporate bonds in their portfolios than investors elsewhere. With the same uniformity of behavior,
New England investors hold United States government bonds less frequently than investors in
other parts of the country.

Investment Banking Houses
in New England
At the close of 1960 the region's investment banking facilities comprised some 3 7 firms which could
be classified as active underwriters - either originating or distributing corporate and municipal
securities. There were 22 firms domiciled in Boston and 15 elsewhere in New England, chiefly in
Connecticut, Rhode Island and Maine. These
houses also engage to a greater or lesser extent in
one or more of the related phases of the securities
business. Approximately 129 branches of 58 New
York City firms and 26 branches of 11 houses
located in Chicago, San Francisco, St. Louis, and
other cities were also situated in Boston and other
principal cities of the region. Included among these
branch offices are six of the 12 nonbank firms
dealing primarily in United States securities- a
larger representation of U. S. securities dealers
than in any city of the nation outside New York
except Chicago.
Ten of the firms now domiciled in the region trace
their inception to 1900 or before. Only two of
the houses presently active as underwriters were
formed after 1940. The New England houses have
also extended their branches and now operate a
larger number than at any time since 1929.
The active underwriters with head offices in New
England, like their counterparts elsewhere, origi-

BANKING

NEW

EN GLAND

nate and distribute issues of all types, carry an
inventory of a fairly wide range of outstanding
securities, and merchandise these securities on a
wholesale and retail basis. The capital of these
houses ranges in size from less than $100 thousand
to more than $10 million; but the great majority
have capital in the neighborhood of only $100
thousand. Nineteen firms had at least one branch
office and seven of them have New York offices.
Five of these firms operate branch networks in
both the established and rapidly growing sections
of the nation. Two of the firms are active on
an international basis. Virtually all of the firms underwrite both corporate and municipal securities.
Three or four of the firms specialize in certain
types of corporate securities and two in municipals.
Such specialization develops greater knowledge
and better judgment in a particular field.
In addition to these facilities there were 238 additional firms engaged in various phases of the securities business. These firms are typically small
in terms of both capital and number of employees.
In capital size they vary from about $20 thousand
to $100 thousand. A number are individual proprietorships or small partnerships with one or two
employees in addition to the proprietor or partners. The principal business of these firms is brokerage; they carry limited inventories of securities
and service a relatively small list of individual
customers. On occasion, some of these firms will
participate to a limited extent in large selling
groups in which underwriters want to spread the
risk widely and accomplish rapid and broad distribution of the offering. A few of these firms
conduct only an interfirm business and in this way
aid in making more continuous markets. Investment trust share distributors are also found in this
group, but their work is more closely related to that
of an issuer than to that of a dealer or underwriter.
Most of these firms have a high proportion of
skilled or technically trained persons or officers
and partners to total employees. The securities
business is essentially a service industry. The success of a firm depends upon its members' broad

knowledge and their ability to assess market and
security values. A knowlege of clientele is equally
essential. These are attributes which can not be
easily passed along and the typical firm lives or
dies with its management.
The financial industry as a whole is a large employer in the region and outranks a number of
manufacturing lines in importance. Moreover,
employment in the industry has increased during
the postwar years from 74,000 to 110,000 persons. Employment in the securities business, however, has declined contrary to the trend in other
branches of finance. Employment in the region
has declined from about 4,500 persons in 1946
to 3,900 in 1960. This is the result of a change
in character of the markets, particularly of the
buying side as represented by the institutional
investors. The sales to these buyers are uniformly
large, and as noted below, issuers may not use the
investment house for the full range of services as in
the past. Other reductions in personnel have
resulted from economies gained through increase
in average firm size. In terms of divisions of business, retail selling still accounts for the largest
proportion of employment; trading second and
underwriting the smallest proportion.

Changes in Population
of Underwriting Firms
The active underwriters domiciled in New England represent about half the number in existence
in 1929. The region's reduction in number of
firms parallels that of the nation as a whole but is
contrary to that of the rapidly developing regions
such as the Pacific Coast and the Southeast and
Southwest, where there has been an increase in the
number of independent firms able to originate and
underwrite both national and local issues.
The reduction in population of firms resulted from
a variety of factors. In part, this has come about
by change in the domicile of firms. Six of the
leading houses, Kidder, Peabody; Lee, Higginson;
Tucker, Anthony and R. L. Day; First Boston;
Hayden, Stone; and Hornblower & Weeks shifted
their head offices to New York, retaining the Boston office as a branch. There have been several
mergers involving some of both the larger and

smaller houses. For example, Paine, Webber
merged with Jackson and Curtis; Arthur Perry &
Company and Whiting, Weeks and Stubbs joined
F. S. Moseley & Company; and Chace, Whiteside
merged with Perrin, West and Winslow. The firm
of Parkinson and Burr became Burr, Gannett,
which was later absorbed by Tucker, Anthony
and Company. Subsequently, Tucker, Anthony
merged with R. L. Day, becoming Tucker, Anthony and R. L. Day before removing their head
office to New York. Finally, the withdrawal of
other firms more than offset new entries.
Reasons for mergers of firms vary, not only within
the region but also within the same community.
Such reasons include the desire to increase capital,
strengthen and assure continuity of management,
increase size and · prestige, enlarge facilities, acquire branches, reduce overhead costs and, in
some cases, forestall failure. Mergers and the

Census of Firms in the Securities Business
(Selected Years)
Boston
1933
Underwriters
30
Firms with branch offices
18
Branches in New England 38
Branches elsewhere
34
Branch offices of New York
underwriting firms
22
Branch offices of underwriting
firms domiciled in Chicago
( and other principal cities) 14
Additional firms with principal
business as brokers,
dealers, etc.
254
Elsewhere in New England
Underwriters
23
Firms with branch offices
7
Branches in New England 16
Brunches elsewhere
2
Branch offices of New York
underwriting firms
19
Branch offices of underwriting
firms domiciled in Chicago
(and other principal cities)
6
Additional firms with principal
business as brokers,
dealer , etc.
179
Branch offices outside
New England
of New York (Chicago and
other principal cities)
underwriting firms with
branches in New England

288

1940

1950
25

1960
22

25
35

12
26
31

38
51

235

156

117

25
7

164

117

121

177

190

831

HISTORY

INVESTM EN T

extension of branches since the war have reflected
the need for reorienting the geographical structure of a firm in an attempt to follow shifting
population centers and changes in administrative
offices of large corporations.

Branches of Outside Houses
There has been a steady increase since the early
1900's in the number of branches placed in Boston
by outside houses. Presently, there are more
branch offices in this area than in any other
principal city in the nation other than New York
and Chicago. Some of the branches were opened
as new offices and others appeared through acquisition of firms domiciled in the region. E. H.
Rollins, very active in originating public utility
securities in the 1920's, was absorbed by Blair and
Company of New York, which retained Rollins'
offices in Boston and other areas as branches.
G. H. Walker & Company of St. Louis absorbed
Bodell & Company in Providence. Branch offices
conduct a variety of business including brokerage,
commodity dealings and investment advice. In
addition, they seek contacts with industrial firms
which are prospects for underwriting and negotiate
private placements with institutional investors.
Some of the offices are granted varying degrees of
autonomy in originating and underwriting corporate securities. In one firm, each office affords its
others an option to participate in their respective
security purchases. In other firms, autonomy is
accorded the branch only in municipals.
More particularly, the branch provides a continuous personal relationship with the large institutional buyers of securities. Some state and local
pension funds and other institutional buyers will
conduct business only with firms which maintain
an office within their state. In some instances, the
region was first serviced by traveling representatives who maintained associations with institutional buyers. The branch, however, enables the
firm to make this contact more secure and allows
development of the individual market which cannot be serviced satisfactorily by travelers. The

BANKING

NEW

ENGLAND

out the nation, even to the extent of purchasing
small amounts of the same issue from all or nearly
all members of an underwriting syndicate. Nationwide purchasing of this sort means, of course, that
the total of securities absorbed in New England
cannot be equated to the sales of home and branch
offices here.

Organization of the

Underwriting Firm
volume of potential business more than offsets the
higher initial cost of the branch. The narrow
market ties between local dealers and New England's institutional investors, which existed at one
time, have been broken to a considerably greater
extent than in such other cities as Philadelphia and
St. Louis. Branch office costs are generally less
than the expenses of an independent firm in the
same area. Machine bookkeeping and centralized
billing in the main office permit the branch to concentrate on sales and new business.
The branches of firms which previously had their
headquarters in the region fall into a special category. Some of these firms have been among the
leading originators and distributors for a long
period of years. The transfer of head offices to
New York reflects an adaptation to the changed
character of the capital market and the more centralized nature of the industry. The Boston
branches of these firms often continue to seek
originations and maintain syndicate departments
as well as serving as sales offices. They may do a
substantial part of the work of originating a new
issue. The territory for seeking new business may
or may not be restricted, depending on the policy
of the house. In most cases, the resident officers
actively participate in making the firm's decisions.
Other firms with headquarters outside New England also actively solicit business in the region by telephone and regular visits of traveling
representatives. These firms seek business principally with the large institutional accounts. The
necessity to maintain extreme breadth in market
ties inclines some institutional investors to make a
practice of purchasing from distributors through-

As modern investment banking initially developed,
it retained some degree of functional separation
of houses as wholesaler or retailer in underwriting new issues, and in conducting brokerage
of outstanding securities. Varying combinations of
functions performed by the same house became
more frequent. Some wholesalers developed retail
departments which distributed to ultimate investors the securities originated in their own wholesale department along with securities purchased
from or sold on commission by other investment
bankers. The retail house bought large blocks of
securities from corporations or public bodies and
resold part to other houses. Today, except for four
or five houses which confine their activities exclusively to originating and arranging syndicates for
the distribution of securities, the typical house
performs a variety of services.
These services have become generally departmentalized in three areas of operation - purchasing, syndicating and retail selling. The formality
and extent of departmentalization depend upon
the capital size of the house and the business
which it customarily handles. In purchasing securities, the house either works by itself with the
issuer or joins with one or two others in an agreement to share responsibilities. Houses which make
a specialty of negotiating issues, particularly those
of firms making initial or infrequent public offerings or issues which are to be privately placed
with institutional buyers, have a staff of professional and technical personnel. They work with
the executives and financial advisers of the issuer,
becoming familiar with the industry and the firm's
history, current operating position and prospects.
On the basis of this study, a detailed financial plan
is discussed with the issuer covering the type of

security and terms of the offering. Final decisions
must then be made about pricing and timing the
issue for the market if a public offering has been
decided upon. This work is reduced in scope if
the house handles only issues of established firms
or if it participates in offerings under public sealed
bids. Generally, the purchasing department either
approves or disapproves participation of the house
in moving an issue originated by another firm.
Buying consists of formulating investment judgment on the soundness of the commitment, considering profitable use of capital of the house, the
ability to market the securities and the suitability
of the issue for customer accounts.
In the case of securities offered for competitive
bidding by an issuer, the purchasing department
will have to familiarize itself with the details and
features of the issue. The participating underwriters then confer at "price meetings" in order
to determine the final setup of the underwriting
account and the bid to be submitted on their behalf by the manager. The bid reflects the price at
which the entire issue can be safely underwritten
and, when decided upon at the final "price meeting," the participants still in the account have
agreed on the spread and offering price to the
public. The difference between the bid and public offering price is the spread or gross compensation of the participants and manager. After the
bids are opened, and usually without reference
to the issuer, the underwriters winning the account
decide on the method of sale and amount of concessions and allowances. The problem of distributing securities won in competitive bidding differs
from that of a negotiated offering because there
is no chance for extended preliminary discussions
with prospective buyers. In many cases, the quality of securities offered under sealed bids is high
and large group sales to institutions are made by
the manager on behalf of the syndicate members.
The syndicate department cooperates closely with
the purchasing department, planning and organizing syndicates and selling groups to underwrite
and distribute the security issues. In carrying out
this work, the department prepares lists of possible
participants, confirms participations, prepares and
accepts syndicate agreements.

HISTORY

INVESTM EN T

The sales department resells to the public. the securities purchased by the house. Except in the
case of smaller houses, sales are made at both
wholesale and retail levels. Wholesale transactions
represent sizable blocks of securities sold to nonunderwriting retailing houses at a small concession from the public offering price or to large
institutional buyers for the account of the several
underwriters. The sales department is organized
in much the same way as the selling department
of any merchandising firm. A sales manager is
placed in charge of the department and salesmen
are employed according to the volume of business.
The house may also have one or two other departments such as trading or statistical and research.
Although all houses do some trading, generally
only the larger houses have sufficient volume to
justify a separate department. The work of the
department arises from several sources - buying
or selling securities for the accounts of the house
or its customers, maintaining markets for the
house's own originations now outstanding, and on
occasion, supporting the market during offerings.
The work of the statistical and research department is varied. Originally established to assist the
purchasing department in making appraisals of
proposed issues and in following the position of
the market, the department's range of operations
has broadened. It may service customer inquiries
for investment information, evaluate privately held
securities or supply periodic market and investment letters. In some cases, it provides a detailed
advisory service for issuers and investors. Some
houses also offer custody and agency arrangements
for both individual and institutional investors. In
addition to statistical work, the department prepares prospectuses for registered issues, news releases and material used in advertising.
Since the new issue business- fluctuates from year
to year, and in some firms comprises a variable
portion of total business, many firms develop other
related business to make the activity of the firm
more stable. The most important of these is bro-

BA N K IN G

NE W

EN G L A N D

kerage and frequently the house is a member of
the New York Stock Exchange, the American
Stock Exchange and one or more regional exchanges. Others conduct extensive business in unlisted securities in the over-the-counter market.

The Corporation and the
Investment Banker
In no period of the nation's financial history can
the scope of markets and financial institutions
compare with those of the post World War II
period. The corporate issuer today has a wide
choice of methods of supplementing retained
earnings to secure funds for capital spending.
The corporation's financial officers may or may
not use the services of an investment banker,
or they may use those services only in a limited
way. The corporation may place its issues directly
with an insurance company or it may meet its
needs for medium and long term funds through a
combined use of commercial banks and insurance
companies in the form of term loans. Many corporations have also developed departments which
perform financial marketing functions at various
times to meet certain needs.
When the corporation uses services of an investment banker, the available types of transactions
include: ( 1 ) a negotiated underwritten public
offering; (2) an underwritten public offering
awarded on the basis of publicly invited sealed
bids, with an investment banker sometimes having
been retained on a fee basis to shape up the issue;
( 3) the so-called "stand-by" offering, a negotiated
underwritten offering to existing security holders
with the investment banker taking up the securities not subscribed for or exchanged; ( 4) an
underwritten offering to existing stockholders
awarded on the basis of publicly invited sealed
bids, with an investment banker having been retained on a fee basis to render professional assistance; (5) a non-underwritten offering to existing
stockholders with an investment banker acting as
agent on a negotiated basis; ( 6) a private place-

ment or a sale and lease back with an investment banker acting as agent of the seller on a
negotiated basis; (7) assistance to companies in
programs of expansion or diversification by means
of merger or acquisition with the investment
banker acting as agent.
Regional business and industrial firms have excellent facilities for marketing security issues and no
lack of buyers; but they generally must meet the
test of the national market. New England's investing institutions have a superior knowledge of
local conditions, although they have no specific
local responsibility since they draw their funds
from all over the nation. This is particularly true
of insurance companies and investment trusts.
These institutions are sources of long- and medium-term credit and it can be expected that they
will continue to consider opportunities for investment in the area as carefully as they will those of
any other region. Keen competition exists among
these institutions in making investments, and the
competition for their funds is equally keen among
issuers scattered over the nation.

Private Placements
Privately placed securities have long played a part
in the financing of corporations, but it is only in
recent years that they have assumed an important
role. The increased use of the private placement
process is due to two underlying causes: the decline in importance of the individual investor and
concurrent rise of institutional investors, and the
decline in the supply of corporate securities relative to the institutional demand. Insurance companies have found it difficult to obtain enough corporate securities to meet their increasing needs.
Thus, in order to be able to assure themselves of
suitably-sized blocks of new securities, many insurance companies take aggressive steps to arrange
for the direct placement of entire issues privately.
Other reasons have been cited for the growing
popularity of private placements. Probably the one
most frequently encountered is that such issues do
not require registration with the Securities and
Exchange Commission. The importance of the
registration question is debatable. The direct expense involved in registration is a very small percentage of the money raised, although the cost of

preparing and submitting the initial registration
statement may well be substantial. At the same
time, the statements and reports required by
lenders in private-placement financing are also
exhaustive, so that the net saving in this direction
may be small. However, there is usually a cost
saving to small borrowers who deal directly with
insurance companies.
From the close of World War II through 19 51
the proportion of direct placements increased
each year to a peak in 19 51 of nearly threefifths of total corporate debt offerings. Since
then, there has been little change in the proportion, and direct placement continues today an important competitor of underwritten offerings. Generally, these placements have been with insurance
., companies, with or without the assistance of an
investment banker. In both cases, however, the
securities are bought directly from the issuer and
either eliminate all of the functions of the investment house or require only certain services by a
single firm.
New England life insurance companies purchased
directly from the issuers nearly 70 per cent of the
$2.8 billion of securities which they acquired in
1959. The proportion was much higher in the case
of some companies and of some types of securities.
Private purchases were of greatest importance in
the acquisition of industrial bonds; more than 97
per cent of the dollar volume was purchased directly from the issuer. In the public utility field,
direct deals accounted for four-fifths of total purchases. Few direct deals were reported in connection with railroad securities or municipals.
The initiative in private placements now seems to
rest with the borrowers. New England insurance
companies report little solicitation of such deals
on their part, stating that from 60 to 70 per cent
of their prospective borrowers come to them
through agents. In practically all other cases, borrowers approach the companies directly.

Influence of Taxes in
Capital Markets
Tax factors have split the capital markets since
the beginning of World War II. Personal income
and inheritance taxes, along with certain corporate

HIST O R Y

IN V E ST M E N T

taxes, have led both individuals and some institutions to seek the shelter of tax exempt yields of
state and local government bonds. Tax-privileged
intermediaries, on the other hand, found the higher
yields of fully taxable corporate and United States
government bonds strongly attractive. Thus, the
bond markets tended to align ( 1 ) state and local
government bonds with individuals and institutions
subject to highly progressive rates of taxation and
( 2) fully taxable corporate and United States
government bonds with institutions enjoying tax
privileges. The combination of saving and tax
forces led financial intermediaries to dominate the
supply of funds in the corporate bond market.
After 19 50 tax exempt corporate and state and
local government pension funds also became important purchasers of fully taxable corporate
bonds.
In part, the recent preference for bond rather than
stock financing lies in United States tax legislation.
Over the postwar period, corporate issues of bonds
comprised about 90 per cent of the total security
issues. Corporations are allowed to deduct bond
interest from taxable income but there is no
exemption for dividends. Other reasons include
the ability to fit the definite commitment of the
interest cost on bonds into long range corporate
financial plans. Stock has less certain financial
effects. Under inflationary conditions which have
characterized much of the postwar period, the
fixed cost of bond interest becomes relatively
smaller. Increases in stock prices and earnings
under inflation impose pressure to pay out earnings. Decisions on the form of financing are influenced by the relative cost of bond vs. stock
financing in any year, and by market demand as
well as corporate policy toward stockholders and
the public.
The general developments cited earlier along with
the legislation of the early 1930's forced the investment banking industry to adapt its operations to
new conditions. In this connection, a fundamental
change in the structure of the industry as contrasted with the pre-1930's was produced by the
withdrawal from the field of the commercial banks

BANKING

NEW

ENGLAND

manager. In making sales for the account of the
underwriters, both to dealers and institutions, the
manager "sells out of the pot".
and their affiliates which had engaged directly in
the underwriting business. The Securities Act of
1934 imposed on each underwriter a civil liability
for omission or misstatement of a material fact in
the registration statement equal to the "total price
at which the securities underwritten by him and distributed to the public were offered to the public."
This liability, plus a transfer tax on bonds and an
increase in the transfer tax on stocks which had
been imposed in 1932, virtually forced underwriters to abandon the purchase of security issues
jointly, or jointly and severally, as had been customary in the 1920's. Purchases, consequently,
came to be made by the various underwriters in
severalty - that is, with each underwriter liable
only to the extent of his own participation. The
banking and purchasing syndicates characteristic
of earlier years disappeared.

Marketing Security Issues
During the postwar period a corporate issue of $5
million has been considered small. Frequently
issues have exceeded $50 million and several have
produced more than $250 million. The largest
flotation since World War II has been the initial
offering of Ford Motor Company's common stock
amounting to about $640 million. Generally, the
size of the syndicates is much larger and at times
involves 200 or 300 houses in the final distribution. The trend toward larger syndicates began
after 1937, when several houses found some issues
so unsuccessful that the resources of a number of
underwriters were seriously strained. Thereafter,
participants in most issues were increased in number to spread the risk as widely as possible.
Currently underwritings are handled on the basis
of an "underwriting agreement" between the issuer
and the underwriters, represented by the manager,
and an agreement among the underwriters. The
manager, like the originating banker or manager
of earlier periods, handles the negotiations with
the issuer and supervises the whole process of
underwriting and distribution. Dealer and group
sales are still made under the authority of the

The maximum life of the syndicate has grown
shorter, and usually runs 15, 20, or 30 days. Some
offerings have been closed out within a few hours.
Depending upon the terms of the agreement, some
syndicates can be extended by the manager to 60
days with or without the unanimous consent of
the members. The business has become even
more competitive than in the 1920's. Houses
have become increasingly conscious of their position and many aggressively seek managerships or
co-managerships both in negotiated issues and in
issues bid competitively.
The complex of developments after World War
II, along with further standardization of securities,
lower interest rates during the 1940's and the
increased importance of specialized institutional
investors, led to further reductions in gross spreads
obtained by underwriters. Negotiated underwritings of industrial bonds are accomplished much
more cheaply than at any time in the past. In
comparison with the 1930's, the spread has declined about 50 per cent and on high grade negotiated issues the gross spread is now frequently less than one point. Of course, underwriting
costs rise as issues increase in risk or decline in
marketability. Competitively bid utility and railroad securities' spreads also show a decline.
In earlier periods there were relatively few corporate issues offered at competitive bidding. Public
sealed bidding increased substantially after the
adoption of S. E. C. Rule U-50 in 1941 for securities of utilities affected by the Public Utility Holding Company act, and the ruling of the Interstate
Commerce Commission covering all debt issues of
railroads.
In addition to companies subject to these requirements, competitive bidding has been used in recent years by certain telephone, electric and gas
companies without legal or regulatory requirement in making offerings. As yet, competitive
bidding has not been used in industrial security
offerings. Securities sold under public sealed bidding have fluctuated at around 50 per cent of the
total amount of securities underwritten during the
last three years.

HISTORY

INVESTMENT

Underwriting Originations
and Participations
In the two decades following 1940 originations
of corporate and foreign offerings by New England
investment bankers were highly variable in dollar
volume and, in contrast to earlier periods, represented only a very small proportion of the national
total. More than any other phase of the investment banking business, origination of issues and
management of syndicates has been concentrated
in New York and to a lesser extent in Chicago.
Utility and industrial securities have dominated
the originations of New England houses. In re-

cent years there has been an increase in proportion of common stock offerings as compared with
bonds and preferred. The issues have included
those of firms in various industries, especially the
region's research-based firms engaged in electronics, atomics, automated equipment, stroboscopy
and other fields. Amusement and recreation industries - among them professional football and
bowling- have also been represented along with
supermarket food stores. The large houses domiciled in Boston continue to view the branches of

Corporate and Foreign Securities in which New England Investment Bankers Participated as
Underwriters 1940-1959
( millions of dollars)
1940

1946

1948

1950

1953

1956

1959

110

13
283

195
1,312

507
16

221

117

58
735
5
127
67

704
96
972
476

1,100
66
536
114

1,278

517

1,624

35
1,329
245
1,307
335
3,251

Bonds
Railroads
Utilities
Foreign Government and Private
Industrial and Miscellaneous
Financial and Real Estate
Total 1

645

Preferred Stocks
Railroads
Utilities
Foreign.
Industrial and Miscellaneous
Financial and Real Estate
Total t

2,248

-1,816

126

150

204

230

63
2

546

225
24

156
28

35
16

191

575

513
2
79
23

219

556

372

-399

388

162
19

263

30
3
110

Common Stocks
Railroads
Utilities
Foreign.
Industrial and Miscellaneous
Financial and Real Estate

-992

281

235
3
261
1

95
90
99
27

500

221

-74
--

591

Total New England participations

1,543

414
130
1,100

1,398

2,133

1,635

3,146

4,342

3,137

Total United States 2 •
New England as per cent
of United States .

2,677

6,953

7,228

6,624

9,181

13,939

10,361

57.6

20.1

29.5

24.7

34.3

31.2

30.3

133
5.0

162
2.3

119

168
2.5

248
1.8

216

1.6

295
3.2

Total

Estimated extent of participations
per cent of the national total .
1
2

306

Detail may not add to total because of rounding.

Annual Reports of the Securities and Exchange Commission.
Source: Commercial and Financial Chronicle.

9
255

-617

2.1

BANKING

NEW

ENGLAND

Frequency Distribution, by Size,
of New England Municipal Bond Issues

1959
firms which have shifted their head offices to New
York as regional houses and these generally become participants in Boston underwritings.

Size of Issue
Dollar Volume
(in thousands
of dollars)

Firms domiciled in the region have continued to be
active in syndicates headed by outside houses and
have participated in between 20 and 35 per cent
of the volume of all corporate and foreign issues.
The amount of their participation has ranged between 6 and 13 per cent of the total value of the
securities purchased by those syndicates. This percentage is comparable to that reported as distributed in the region by branches of outside firms for
those issues which their head office originates or
in which they take a major position.

0-$49
$50-$99
$100-$249
$250-$499
$500-$749
$7 50-$999
$1,000-$1,999
$2,000-$4,999
$5,000-$9,999
$10,000-$19,999
$20,000 and over

Although the syndicate participations by local
firms have diminished relative to the 1920's they
remain substantial and have included many of the
nation's large and small corporations. They have
taken large positions in issues of Detroit Edison,
Boston Edison, Kansas Power and Light, Electro
Voice, Minute Maid, General Motors, Ford,
Sylvania Electric, Foxboro Instruments, Dewey
and Almy, Pitney-Bowes, Transitron, Tracerlab,
Raytheon, Trans-Sonics, American Can, American
Telephone, Pacific Finance, Green Shoe, New
Hampshire Ball Bearings, Allegheny Airlines,
American Airlines, Phillips Petroleum, Tennessee
Gas Transmission, Commonwealth of Australia
and Dominion of Canada.

Source: The Bond Buyer.

Municipal Underwriting since
World War II
One of the most significant postwar changes in the
capital markets has been the six-fold increase in
the annual volume of new state and local government bonds, bringing with it national and regional
alterations in the structure of the municipal market. Postponement of state and municipal construction programs during the war created a large
backlog of public works projects. While many
governments had accumulated financial reserves
during the war, these proved inadequate in a period of rising prices to meet the demand for

Total Dollar Volume of Issues
Total Number of Issues

Number

9
27
72
45
34
20
50

28
4
3
5
$608,308
297

schools, roads, hospitals and other public facilities.
The annual volume of municipal bonds thus rose
rapidly from $1.2 billion in 1946 to a record of
$7.7 billion in 1959. The volume of New England
issues has approximated 8 per cent of the national
total during the postwar years - about double the
prewar proportion.
Some 300 New England municipal issues are
offered in a typical year. In dollar size their distribution conforms closely to the national pattern,
exhibiting a wide range with the smallest at about
$50 thousand and the largest exceeding $50
million. Most of the issues are small, over half
the number are less than $500 thousand, 70 per
cent less than $1 million, and only 4 per cent of
the number exceed $5 million in size. Thus a small
percentage of the number of issues accounts for
60 per cent of the total principal amount. This
contrasts sharply with the corporate field where
about 90 per cent of the issues usually exceed
$1 million in size. Small issues in the corporate
field constitute a distinctly lower proportion of the
aggregate principal amount than do small municipals.
The number of investment banking houses underwriting municipal issues in New England was
about the same at the close of World War II as it
had been during the 1930's. As the number of

issues increased, more firms entered the field, including a large number of branch offices of outside firms. By 1950, one-third of the 33 New
England houses which underwrote municipals
were branches of firms with headquarters in New
York or elsewhere. In 1959 these branches represented half of the 64 underwriters in the region.
Branch offices placed in the region began to participate in locally formed underwriting syndicates
or purchase singly issues of some New England
units of government. These offices are generally
granted more autonomy in their municipal operations, both with respect to underwriting and trading accounts, than in the corporate field.
Commercial banks in the region play a limited role
as underwriters of municipal issues in comparison
with banks in other regions. Nationally, the banks
underwrite over half of the general obligation municipal bonds issued in a typical year. Banks in
New England generally underwrite only issues of
the smaller towns and most of these are held in
the banks' portfolios. A few of the larger banks,
however, join syndicates established to offer the
general market names. In 1946 New England
banks underwrote singly about 6 per cent of the
total volume of New England issues; this portion
fell to about 1 per cent in 1959. They participated
however, in syndicates which marketed 7 per cent
of the New England total.

Massachusetts Turnpike Authority $239,000,000
3.30 Per Cent 40 Year Revenue Bonds,
Dated May 1, 1954
(millions of dollars)
Amount of
Underwriters'
Sales for
Participations Group Account
$137.9
$ 41.9
19.8
18.4
18.6
1.9

Geographical Area
New York City
Boston
Chicago
New England States
( excluding Boston)
1.8
Mid Atlantic States (excluding
New York City. including
Washington, D. C.)
19.5
Southeastern States
11.8
Great Lakes States
( excluding Chicago)
16.5
Mid Western States
5.3
Southwestern States
1.6
Pacific Coast States
6.2
Canada
0
$239.0

28.2

18.0
1.2
3.0
2.0
0
2.7
2.2
$119.5

HISTORY

INVESTM EN T

Several reasons may be advanced to account for
this difference in New England bank participation
in municipal underwriting. Unlike governments in
other regions, many local units issue short term
tax anticipation notes and most of these are purchased by the banks. In addition to purchasing
and holding the tax notes, the banks like those
elsewhere perform other services for local governments. They advise on technical details of the issue
and act as certifying and paying agents for the
bonds. By helping to present municipal data in an
orderly fashion the banks have increased the number of bids received by communities when an issue
is offered. Historical relations between the region's
financial institutions also form part of the explanation. The region early developed a number of
investment houses which became active in this
field, combining it with other underwriting business.
Most of the small issues are underwritten entirely
in the region, either singly by an investment
banker, or by a small syndicate formed entirely of
local firms. The bulk of the larger issues are underwritten by syndicates managed in New York City,
often by firms which maintain branch offices in the
New England region. While larger issues are sold
in all parts of the country, smaller issues are sold
predominantly to local investors. Local investment
banking firms enter into the national market for
municipal issues to the extent that they participate
in the large syndicates formed to purchase issues
originating elsewhere. The local houses are important distributive links to the commercial banks
and other institutional investors in the region.
The portion of New England issues underwritten
entirely in New England has increased from 15 to
20 per cent during the postwar period; but this
proportion is small when compared with earlier
years when practically all New England issues
were underwritten within the region. Syndicates
which include both New England and outside firms
have underwritten a growing portion of all New
England issues. This practice reflects the increased
competition for large issues and the necessity to
guarantee adequate distributive capacity. Gen-

BANKING

NEW

ENGLAND

63
Municipal Bond Underwriting
(millions of dollars)

erally, New York City houses or New York banks
with dealer departments head these syndicates.
There are important exceptions to this pattern,
however. One of the large houses domiciled in
Boston, F. S. Moseley & Company, originated the
two revenue bond issues of the Massachusetts
Turnpike Authority. The $239 million negotiated
issue of the Authority in 1954 is the largest issue
ever originated in New England. The Boston firm
headed the syndicate with three co-managers. The
participants included 382 firms with domicile in
all parts of the nation; no one firm had a participation of more than $4 million and the smallest
participants took $100 thousand. The composition of the underwriting syndicate reflects the geographical spread of a large underwriting.

Participation in
Municipal Syndicates
Municipal underwriters in New England ( domiciled firms or branches of outside firms) generally
manage syndicates formed to underwrite New
England issues whose average size is somewhat
over $1 million. The managers of these accounts
usually take a participation as large as 25-30 per
cent, but on occasion they may have the privilege
of increasing their participation. The other New
England houses participating in syndicates managed in New England typically take a 20 per cent
participation. Issues for which New York and
Chicago banks act as manager or co-manager
average $15.5 million in size and their participations in these issues are about 10 per cent.
Investment banking houses in New England participate in most of the large syndicates headed by
New York banks or firms which are formed to
purchase the large issues of New England cities,
states or special authorities. Each New England
house takes as its participation about 2 per cent of
the entire issue. The exact extent of a firm's participation in one of the larger mixed syndicates
depends upon the particular issue and the
size and prominence of the house. If it is expected

1946

1950

1955

1959

96.0

608.3

15.8

299.3
43.9

433.2

Underwritten in N. E.

83.3

123.4

Underwritten Outside
N.E.

26.9

62.0

74.1

15.8

Underwritten by Mixed
Syndicates
53.4

193 . .5

275.8

469.2

131.5

652.5

366.1

n. a.

Total N. E. Issues

Underwritings of Outside
Issues by Investment
Bankers in N. E.
Outside Issues Underwritten by Mixed
Syndicates

Total of All State and
Municipal Issues in
1,203.6 3,693.6 5,976.5 7,681.1
the U.S.
New England Portion
of this Total
8.0%
8.1%
7.3%
7.9%
Number of N. E. Investment Banking Houses
which Underwrote
Municipal Issues
n. a.

= not available.

Source: The Bond Buyer.

that an issue will not have a favorable market in
New England, local firms without outside distribution facilities will not participate in the syndicate. But firms with branch offices in other parts
of the country generally join with the expectation
that their participation would be sold through
those branch offices.
The New York City banks which purchase New
England issues singly, buy issues whose average
size is about $250 thousand. Boston investment
banking houses buy singly issues whose average
size is $170 thousand and the few underwriters in
other New England cities buy entire issues whose
average size is $ 100 thousand.

Buyers of Municipals in
New England
The amount of a New England municipal sold to
investors in the region is estimated by individual
firms to range from 40 to 100 per cent. The figure
90 per cent was given as typical for the smaller

64 • .

H IS T O R Y

IN V E S T M E N T

issues. The large New York banks which underwrite New England's general market issues rely
only to a small degree on the region's investors. It
is estimated that about two-thirds of the region's
outstanding municipal debt in locally held, largely
by commercial banks, fire, marine and casualty
companies which are subject to the full corporate
tax rate and individuals subject to high personal
income tax rates.
Municipals issued elsewhere in the nation are also
sold by local investment bankers to regional customers. In making these sales they may be helping
to distribute a new issue or they may be acting in
the capacity of broker. The portion of New England bonds in the total of all municipal bonds sold
by the region's investment banking houses varies
widely, from 10-90 per cent. Larger firms usually
sell a wider range of municipal issues, hence only
a small portion of their total municipal sales represents bonds issued in New England.
While there are several small firms which purchase
only a few issues during a year there is no group
of firms which dominates the business. Some New
England firms specialize in issues of units of gov-

ernment within their own state; this is particularly true of the firms domiciled in cities outside
Boston. The advent of special kinds of government
securities during the past decade has led to the
development of specialties within the municipal
business. The Massachusetts state guarantee of
local housing authority bonds led to the formation
of a few fairly large syndicates which make a special practice of bidding on all of these issues.
Regional school district bonds find their buyers
among some rather than all investment bankers.
One firm makes a specialty of the bonds of territorial possessions of the United States.

New England's Position in the Capital Market
New England's current position in the structure of
the long term capital market is third, ranking
behind New York and Chicago as measured by the
origination and distribution of security issues and
by the number of large buyers, both institutional
and individual, located in the region. For a period
prior to the Civil War the region represented the
nation's primary long term capital market and
during the late 1800's held a dominant position
in the origination and distribution of securities of
issuers from all parts of the country. Until the
depression of the 1930's the region's investment
banking houses maintained a distinctive position
in the distribution of securities. As early as 1905
two Boston houses were among five in the nation
which could provide national distribution of an
issue while others were leading specialists in the
securities of particular industries. Dominant
houses at this time were in a position to offer specialized services to issuers.

As industrial development spread, as the number
of investors and savers increased, and as the classification of institutional lenders became clear cut,
corporate financial plans and security issues became more standardized. The independent manufacturing concern became a division of a national
concern with headquarters elsewhere as part of a
vertical, horizontal, or circular combination or
merely through outright consolidation. As divisions of labor became more specialized, industry
migrated from one region to another in search of
lower labor costs or other competitive advantages.
Most of the regions in the nation came to contain
a variety of business interests similar to the nation
as a whole and an increasing number of goods and
services was traded in a single market. Public utilities developed financial structures which were
closely similar because of the nature of the business and the influence of regulatory commissions.
The requirements of other issuers became more

BANKING

NEW

ENGLAND

of a branch office for underwriting purposes only
is no longer considered feasible.

standardized. Security issues came to be arranged
by the administrative and financial officers of the
concern. With increasing frequency, these officers
are headquartered in New York or Chicago, or
regularly visit these cities.
These developments contributed to the breaking
of established ties with investment bankers, and to
the growth of a large number of investment houses
in all sections of the nation able to offer basic
underwriting services to any issuer. Investment
houses shifted head offices to New York or established branches in that city to improve their
competitive position. Financial centers in San
Francisco and the Southeast and Southwest developed independent houses which competed with
the larger houses for underwriting of growing local
firms, Outside houses tended to limit establishment of offices in a region unless there was an
attractive concentration of institutional and individual buyers. The underwriting business has
become so highly competitive that establishment

New England's investment banking structure reflects and was affected by all of these developments. The region in 1960 no longer holds a distinctive place in the originating of securities. Its
identity has been merged with the national market.
Houses continuing domicile in New England, with
several exceptions, now generally originate only
relatively small local issues, many of which are for
growing research-based industries in electronics
and related fields or for concerns such as food
supermarket chains with regional markets. They
also originate medium and smaller sized municipal
issues. Contrary to practice in other regions, most
New England banks do not underwrite municipal
issues to any extent. The distinctive position of
the region in the investment banking field today
is found on the buying side as a result of the growth
of the institutional market and the better than
average individual market. New England's facilities thus emphasize distribution, which is reflected
by the large number of branches of outside firms
ranking high in capital size which have opened
offices in Boston and other New England cities.

Acknowledgements
This study of investment banking in New England was organized and directed by Parker B. Willis,
Economic Adviser, Federal Reserve Bank of Boston. His principal assistant was Bruce F. Davie,
Teaching Fellow at Harvard University. Others who participated in phases of the study were: Daniel
Ounjian, Instructor, Tufts University; Edwin B. Cox, Assistant Professor, Boston University and
Victor L. Andrews, Assistant Professor, Massachusetts Institute of Technology. Acknowledgement is
made to a number of persons in the investment banking community in Boston who provided material
and discussed various aspects of the work. Among these are John R. Chapin and S. Melvin Rines,
Kidder, Peabody & Co.; John 0. Stubbs and Arthur Perry, F. S. Moseley & Co.; Bert L. Jacobs,
Halsey, Stuart & Co., Inc.; Charles E. Cotting and Henry S. Rogerson, Lee Higginson Corporation;
James J. Minot, Paine, Webber, Jackson & Curtis; Oliver Shugrue, Salomon Bros. & Hutzler; William
T. Kemble, Estabrook & Co.; Edward N. McMillan, Merrill Lynch, Pierce, Fenner & Smith, Inc.;
Lawrence Marshall, Bankers Trust Company.
For the illustrative material used in this report, the Reserve Bank acknowledges
assistance of the American Antiquarian Society of Worcester, Massachusetts, and
Library, Harvard University. The map on page four is adapted from a photograph of the
the United States located on the campus of Babson Institute, Wellesley, Massachusetts,
duced by courtesy of the Institute.

the generous
the Widener
relief map of
and is repro-

SELECTED BIBLIOGRAPHY
BOOKS
Atkins, Willard E., George W. Edwards and Harold G. Moulton. The Regulation of the Security Markets.
Washington, D. C.: The Brookings Institution, 1946.
Benedict, C. Harry. Red Metal. Ann Arbor, 1952.
Bonbright, James C. and Gardiner C. Means. The Holding Company: Its Public Significance and its Regulation.
New York, 1932.
The Boston Herald. Commercial and Financial New England. Boston, 1906.
The Boston Stock Exchange. Boston, 1893.
Brown, John Crosby. A Hundred Years of Merchant Banking: A History of Brown Brothers and Co., Brown,
Shipley and Co., and Allied Firms. New York, 1909.
Childs, Charles Frederick. Concerning U. S. Government Securities. Chicago, 1947.
Coolidge, T. Jefferson. The Autobiography of T. Jefferson Coolidge 1831-1920. Boston, 1923.
Davis, Joseph Stancliffe. Essays in the Earlier History of American Corporations. Number IV: Eighteenth
Century Business Corporations in the United States. Cambridge, 1917.
Department of the Interior, Census Office. Report on Valuation, Taxation, and Public Indebtedness, 10th
Census, Vol. VII, 1884.
Dewing, A. S. Corporate Promotions and Reorganizations. Cambridge, 1914.
---. The Financial Policy of Corporations. Vol. II. 4th ed. New York, 1941.
Friend, Irwin, G. Wright Hoffman, Willis J. Winn. The Over-the-Counter Securities Market. New York, 1958.
Gates, William B. Jr. Michigan Copper and Boston Dollars. Cambridge, 1951.
Goldsmith, Raymond W. Financial Intermediaries in the American Economy since 1900. National Bureau of
Economic Research. Princeton, 1958.
---. Financial Intermediaries in the American Economy since 1900 (Supplementary Appendixes). National Bureau of Economic Research. New York, 1958.
---. A Study of Saving in the U.S.A. 1955-56. National Bureau of Economic Research. Princeton,
1955-56.
Goodrich, Carter. Government Promotion of American Canals and Railroads, 1800-1890. New York, 1960.
Grayson, Theodore J. Leaders and Periods of American Finance. New York, 1932.
Haven, T. Kenneth. Investment Banking under the Securities and Exchange Commission. Ann Arbor, 1940.
Hidy, Ralph Williard. The House of Baring in American Trade and Finance: English Merchant Bankers at
Work, 1763-1861. Cambridge, 1949.
Hillhouse,. A. M. Municipal Bonds: A Century of Experience. New York, 1936.
Huse, Charles Phillips. The Financial History of Boston. Cambridge, 1916.
Kirkland, Edward. Men, Cities and Transportation, A Study of New England History 1820-1900. Cambridge,
1948.
Larson, Henrietta M. Jay Cooke, Private Banker. Cambridge, 1939.
Leness, George J., Gillette K. Martin, Roger T. Gillmartin. New Money for Business. New York, 1956.
Lyon, Hastings. Corporations and their Financing. New York (c. 1938).
Martin, Joseph G. A Century of Finance: Martin's History of the Boston Stock and Money Markets. Boston,
1898.
McClintock, Franklin T. Competitive Bidding for New Issues of Securities. New York: Harriman Ripley &
Co., Inc., 1939.
McGrane, Reginald C. Foreign Bondholders and American State Debts. New York, 1935.
Myers, Margaret G. The New York Money Market. Vol. I. New York, 1931.
Oberholtzer, E. P. Jay Cooke, Financier of the Civil War. Vols. I and II. Philadelphia, 1907.
Peach, W. Nelson. The Security Affiliates of National Banks. Baltimore, 1941.
Pearson, Henry G. An American Railroad Builder, John Murray Forbes. Boston, 1911.
---. Son of New England: James Jackson Storrow 1864-1926. Boston, 1932.
Perry, Bliss. Life and Letters of Henry Lee Higginson. Boston, 1921.
Ratchford, Benjamin Ulysses. American State Debts. Durham, 1941.
Redlich, Fritz. The Molding of American Banking. Parts I and II. New York, 1951.
Robinson, Roland I. Postwar Market for State and Local Government Securities. National Bureau of Economic
Research, 1960.
Roosa, Robert V. Federal Reserve Operations in the Money and Government Securities Markets. New York,
1956.
Securities and Exchange Commission. Cost of Flotation 1945-1949. Washington, D. C., 1951.
---. Cost of Flotation of Corporate Securities 1951-1955. Washington, D. C., 1957.
---. Selected Statistics on Securities and on Exchange Markets. Washington, D. C., August 1939.
Stehman, J. W. Financial History of the American Telephone and Telegraph Company. New York, 1925.
Stevens, Marshall Wilkins. History of Lee, Higginson and Co. Boston, 1927.
Temporary National Economic Committee, 76th Congress, 2nd Session, Hearings Pursuant to Public Resolution
No. 113, Parts 22, 23, 24 ( 1940).

Trotter, Alexander. Observations on the Financial Position and Credit of such of the States of the North
American Union as have contracted Public Debts. London, 1839.
U. S. Congress. Money Trust Investigation. Hearings before a Subcommittee of the House Committee on
Banking and Currency pursuant to H. R. 429 and 504, 62nd Congress, 2nd Session, 1912.
---. Report of William Cost Johnson. 27th Congress, 3rd Session, House of Representatives, Report No.
296, March 2, 1843.
U.S. v. Morgan et al., 118 F. S. 621 (S.D.N.Y., 1953).
Defendants' Preliminary Memorandum for the Court·
Defendants' Brief on Price Agreements in Security Underwritings
Brief on the Service Function of the Investment Banker
Memorandum of the Chronology of Investigations
Brief on General Points in Support of Motions to Dismiss of Defendants Blyth & Co., Inc., The First
Boston Corporation, Glore, Forgan & Co., Goldman, Sachs & Co. and Lehman Brothers.
Valentine, Roger W. "Investment Banking- History and Regulation" in American Financial Institutions.
Edited by Herbert V. Prochnow. New York, 1951.
Waterman, Merwin H. Investment Banking Functions. Ann Arbor, 1958.
Willis, H. P. and J. I. Bogen. Investment Banking. New York, 1935.
Winsor, Justin (ed.). The Memorial History of Boston. Vol. IV. Boston, 1881.
ARTICLES AND PERIODICALS
American Bank Reporter. Fall Edition, 1902.
American Underwriting Houses and Their Issues. Vols. I-VII. National Statistical Services, New York, 1928-1936.
Babize, A. C. Investment Bankers and Brokers of America. Chicago, 1929.
Bankers Magazine. 1854.
The Bond Buyer.
Brooks, John. "The Adventure." The New Yorker, April 23, 1955.
---. "This Way to Sign Up for Ford, Boys!" The New Yorker, February 11, 1956.
Bureau of Business Research. "Investment Banking in Chicago." University of Illinois Bulletin #13, Business
Research Bulletin # 39 (November 1931).
Chandler, Alfred D. Jr. "Patterns of American Railroad Finance 1830-1850." The Business History Review,
XXVIII, September 1954.
Commercial and Financial Chronicle.
Davis, Lance E. "The New England Textile Mills and the Capital Market, A Study of Industrial Borrowing,
1840-1860." Journal of Economic History, March 1960.
---. "Stock Ownership in the Early New England Textile Industry." The Business History Review, XXXII,
Summer 1958.
Hidy, Ralph Willard. "Origin and Function of Anglo-American Merchant Banks." Journal of Economic History, I, Supplement, December 1941.
Hollander, Jacob H. "The Security Holdings of National Banks." American Economic Review, III, No. 4,
December 1913.
Larson, Henrietta. "S. and M. Allen - Lottery Exchange and Stock Brokerage." Journal .of Economic and
Business History, III, No. 3, May 1931.
---. "A China Trader Turns Investor." Harvard Business Review, XI, No. 3, April 1934.
--·-. "E.W. Clarke and Co., 1837-57; The Beginning of an American Private Bank." Journal of Economic
and Business History, IV, No. 3, May 1932.
Navin, Thomas R. and Marian V. Sears. "The Rise of a Market for Industrial Securities 1887-1902!' The
Business History Revew, XXIX, June 1955.
Seibert, D. Security Dealers of North America. New York.
Sites, Henry W. Investment Bankers and Brokers of America.
Statistical Abstract of the U.S. Various years, 1920 to date.
"Underwriting '400' Have Record Year." Finance, March 15, 1960.
UNPUBLISHED MATERIAL
Chandler, Alfred D. Jr. "The Pen in Business: A Biography of Henry Varnum Poor." (Manuscript, Ph.D.
thesis, Harvard University). Cambridge, 1951.
Cohan, Avery B. "The Price of Underwriting Services on Corporate Debt, 1935-1952.'' (Unpublished doctoral
dissertation in the Department of Economics at Columbia University). New York, April 1959.
The Jay Cooke Papers. Baker Library, Harvard University.
Cox, Edwin B. "Trends in the Distribution of Stock Ownership." (Unpublished Ph.D. thesis, University of
Pennsylvania). Philadelphia, June 1960.
Gaines, Tilford C. "Techniques of Treasury Debt Management.'' (Doctorial dissertation under the Joint
. Committee of Graduate Instruction at Columbia University). New York, 1959.
Hidy, Mariel Em mis. "George Peabody, Merchant and Financier 1829- 1854." (Manuscript, Ph.D. thesis,
Radcliffe College). Cambridge, 1939.

I I,

Full text of A History of Investment Banking in New England

FRASER