Investment Banking in America: A History

As a specialized middleman the investment banker is largely a development of the twentieth century. His job is to serve the users and suppliers of capital by providing the facilities through which savings are channeled into long-term investment. In the nineteenth century this function was performed by merchants, private bankers, and other intermediaries who carried on a large number of services concerned with marketing goods and securities. This study analyzes the changing role and practices of the investment banker in the American economy from the 1890s to the 1960s. It describes the function and status of investment banking at the turn of the century, identifies the forces that prompted change, and explores the way security firms adapted their operations to alterations in the economic, social, and political environment. Economic and political pressures forced significant adaptations and alterations in the way investment bankers fulfilled their primary function of recruiting capital for industry and governments. In the course of adjusting to the needs and temper of the times the investment banker played many scenes on the American stage. Early in the century he strode across it, a figure of dominant economic influence. His role was so significant and pervasive that it invited attack. From time to time he was regarded as the villain, sometimes with justice, sometimes not, and his role became the basis for the rationalization of political action that set new parameters to his behavior. Throughout these years, investment bankers defended their policies and practices as valid and upright, while executing a strategic retreat. Between 1900 and 1960 investment bankers were forced to adapt their operations to many new legal requirements. Changes in investment banking methods that resulted from social and political pressures, with but few exceptions, appeared to have been no greater than those that grew out of the changes in the supply and demand for capital. Neither public pressure nor economic change deprived the investment banker of his primary function. What changed, sometimes drastically, was the way he provided this all-important service. Equally important was the transformation that occurred in the investment banker’s public image and relative status and influence in the economy.