Wall Street History: Carnegie, Circuit Breakers And Dynamite

By Andrew Beattie | November 24, 2010 AAA
Wall Street History: Carnegie, Circuit Breakers And Dynamite

This week in financial history runs up against up one of the pivotal points in history in the broadest sense – the assassination of President John F. Kennedy. Although Kennedy's assassination did impact markets around the world, it would be wrong to do a purely financial take upon it. So we'll stick to what we know and look at what else happened this week, starting with comparably good news.
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The Ghost of 1929
Although it was over 25 years in the making, on November 23, 1954, the DJIA finally closed above its pre-1929 crash peak of 381.17. The peak occurred on September 3, 1929. Of course, we've recently had our own crash, topping out at 14,164.53 on October 9, 2007.

If this housing/mortgage market crash really is the new millennium version of the Great Depression, then we won't be seeing Dow 14K again until 2032. However, considering we are already at Dow 11,000 a mere three years later, this seems unlikely. Three years after the 1929 crash, the Dow was still in the sixties. That's not to say we are in good shape, but as far as percentage declines in the Dow, this one doesn't come near to 1929. (Learn about the series of events that triggered the Great Depression. See The Crash Of 1929 - Could It Happen Again?)

Ghosts of 1987: Price Ceilings
On November 23, 1987, the Chicago Board of Trade (CBOT) introduced price ceilings that limited the index futures within a range of 40 points for the 20 stocks making up the Major Market Index future and 25 points for the Institutional Index future. This was a direct reaction to the 1987 crash.

Although futures were not singled out as program trading was, traders and institutions were buying beaten down futures and selling stocks on the NYSE in hopes of profiting from the arbitrage created by the out-of-sync markets. This selling drove stock prices down even more sharply, triggered more automated stop-losses, and on and on. The new price ceilings were meant to lock the futures into a range that limited the arbitrage opportunities.

And Circuit Breakers
Interestingly, November 24, 1997, saw the circuit breaker system that also grew out of the 1987 crash come under fire. Because the breakers were placed at point drops – in this case 350 and 500 points – rather than a percentage of the Dow, they naturally represented a lower percentage move in the Dow as the index grew. (It is impossible to avoid them completely, but there is a systematic method you can use to control them. Check out Limiting Losses.)

In 1997, the NYSE moved towards percentages of 10% and 20%, meaning changes of around 800 and 1,500 points for the Dow at that time, but settled for changing the breakers to trading pauses of a half hour rather than a complete lock out. Now, following the flash crash this year, circuit breakers with five-minute pauses for individual stocks rising or falling 10% have been proposed. Most market purists are, of course, wholly against the idea.

A Tale of Two Philanthropists: Andrew Carnegie
On November 25, 1835, Andrew Carnegie was born in Scotland. Carnegie came to the states and, through charm, hard work and some hard-nosed tactics, built the Carnegie Steel Company. The company would eventually be sold to the JPMorgan backed U.S. Steel, making Carnegie one of the world's richest men. Carnegie then turned his energies and attentions to philanthropy.

Following the same naming guidelines that led to the Carnegie Steel Company, Carnegie founded the Carnegie libraries, Carnegie Institute of Technology, the Carnegie Institution, Carnegie Hall, the Carnegie Hero Fund and numerous other organizations that are equally recognizable as his work. In his "Gospel of Wealth", Carnegie said it was the responsibility of the wealthy to be generous and charitable – if not necessarily humble – and he backed up those words with one of the world's largest fortunes.

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And Alfred Nobel
On November 25, 1867, Alfred Nobel – another philanthropist not shy about throwing his name out there - received the patent for dynamite. It is dynamite, originally intended to aid in mining, that built Nobel's fortune. Of course, dynamite proved as good at blowing up people as it was at clearing rocks, giving Nobel an unfairly harsh image in the public mind. After an obituary referring to him as a "merchant of death" showed up by mistake, Nobel is reported to have come up with idea of funding the Nobel Prizes to save his legacy from infamy. Since his death, Nobel Prizes have been given out in chemistry, medicine, literature, physics, peace and the somewhat disputed area of economics. (Before you try to profit from their theories, you should learn about the creators themselves. To learn more, read Nobel Winners Are Economic Prizes.)

That's all for this week. Next week, we will get into the Christmas spirit with some bankruptcies and buyouts.

Find out what happened in financial news this week. Read Water Cooler Finance: GM's Dramatic Return.

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