It was a time of booming profits, over-the-top deals, and industry icons. The end result was a swift fall. This is the story of investment banking circa 1900 through 2007.
From the Gilded Age through the Roaring Twenties
In the early 1900s, investment banks were partnerships. Most people relied on them to provide financing for businesses to grow or expand, such as buying machinery and equipment. The firms would then charge interest for this service, which would amount to a nice profit when the business prospered. Investment banks provided other services as well, such as advising companies on mergers or acquisitions and helping companies take their securities public.
Investment banks in the early 1900s.
The stock market soared as well. The Dow Jones Industrial Average (DJIA) rose from 56 to 66 between 1901 and 1908, with the railroad industry leading all others in production gain. There was a huge demand for new securities to buy, which created a heavy demand for investment banks to sell them in order to meet this need. For example, investment banks sold $450 million worth of railroad stocks in 1905 alone—a 200% increase over the previous year’s total.
The U.S. economy was booming to the point where some cities were enough to support their own stock exchanges, and so many of these started up in the early 1900s. New railroads were being built or completed, and the huge demand for investment banks meant that they did a lot of business with them—making even more money. In 1913, investment banks made $4 billion in revenue by providing financing for more than two thousand companies.
Many investment banks were involved in the stock market boom of the early 1900s.
And they weren’t just making money—they were spending it as well. Most of this was focused on buying companies, which reached a frenzy in 1915 when investment banks made more than $1 billion in acquisitions. This had a positive effect for employees as well: starting salaries at firms ranged from $5000 per year at the smallest to $25,000 per year for those with five or more partners.
The big wealth of the Gilded Age did not make it into the years between 1897 and 1920 much. In fact, the Dow Jones Industrial Average was down by a factor of three by 1915. This time period is known as the Roaring Twenties, and it is also when prohibition and jazz music hit their peak popularity.
The Great Depression and Investment Banks: From 1929 to 1999
There were a few years of growth during the early 1930s after the stock market dropped, but this did not last. The Great Depression was just bearable for investment banks because most of them would shortly undergo a restructuring. The business model changed over the next few years as many became a larger holding company that focused on repackaging companies, selling their securities, and then buying other companies.
The 1929 stock market crash eventually led to the Great Depression. Here, people wait in line outside of a bank in 1930.
Need An Investment Bank?
In this article, we covered some of the history and operations of investment banks. But if you need one, check out Chardan Capital today.