What Is the Buttonwood Agreement?
The Buttonwood Agreement was a written compact made in 1792 between 24 stockbrokers and merchants on Wall Street in New York City. Rumored to have been created under a buttonwood tree (hence the name), the agreement marked the origin of an official stock exchange for the young United States and the beginnings of an American investment community that would come to be known as "Wall Street."
- The Buttonwood Agreement was signed in 1792.
- It was written by 24 stockbrokers and merchants on Wall Street in New York City and formed the foundations of the New York Stock Exchange.
- The agreement was signed under a buttonwood tree, according to historical lore.
- The rules set under the Buttonwood Agreement were based on existing European trading systems of the time.
- The agreement aimed to create trust in the system whereby the brokers and merchants would only trade with each other and charge a set commission for their services.
Understanding the Buttonwood Agreement
The Buttonwood Agreement came about in response to the Financial Panic of 1792: an intense, two-month period precipitated by a liberal loan policy on the part of the new Bank of the United States as well as attempts by unscrupulous speculators to corner the debt securities market. When they failed, defaulting on their loans, it caused a run on the banks and a panicked selling of securities.
By extending credit and cash to local banks, Secretary of the Treasury Alexander Hamilton managed to contain the crisis by May. But the young U.S. and its financial system had been badly rattled, and many in the investment community felt there was a need to re-establish trust in the marketplace, and to safeguard investors' interests.
To that end, two dozen merchants and brokers—the creme de la creme of the New York business/financial community—gathered on May 17, 1792, reputedly at what's now 68 Wall Street, under the shade of a buttonwood (aka a sycamore) tree to sign a written agreement they'd been discussing since March. Basically, they formed a club, agreeing to trade directly and exclusively with each other under some common rules and boundaries.
By closing the system against outside agents and auctioneers (who had often conducted bond auctions and stock trades up to now) the participants would be assured that they could trust each other, that payments would be honored, and investments were legitimate. And their clients could have confidence as well.
It also meant these brokers wouldn't try to undercut each other with lower commissions. “It’s profitable to be in this club, so you’re going to follow the rules because you want to remain in the club,” as economic historian Robert E. Wright Wright characterized the pact. “When you all know each other, why screw each other?”
What Did the Buttonwood Agreement Say?
The Buttonwood principals based their securities trading parameters on existing European trading systems at that time. In fact, the Spanish practice of dividing the silver dollar into eighths was largely responsible for the prevalence of fractions when describing stock values.
The Agreement itself was short—two sentences, with two provisions:
1. The brokers were to deal only with each other
2. They would charge clients commissions on their trades, at a set rate of 0.25% per transaction
In other words, they wouldn’t have to be worrying about selling bad stock or competition over commission rates, so the prices charged would reflect the value of the stock, not some other factor.
The exact text of the Buttonwood Agreement reads:
"We the Subscribers, Brokers for the Purchase and Sale of Public Stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of Public Stock, at a less rate than one quarter per cent Commission on the Specie value and that we will give a preference to each other in our Negotiations. In Testimony whereof we have set our hands this 17th day of May at New York. 1792."
The Button Agreement and the New York Stock Exchange
By creating a closed, members-only financial marketplace, the Buttonwood Agreement set up the foundations of what would become the New York Stock Exchange (NYSE)—although the exchange would not be formally organized and given a constitution for another quarter of a century.
By 1793, the ranks of New York brokers had gotten too big to meet under buttonwood trees, and they made an elaborate coffee house, the Tontine Coffee House, their new center of operations.
More securities-industry growth followed the growth of the U.S., especially after the end of The War of 1812. In 1817, as New York began to surpass Philadelphia as the nation's financial center, the Buttonwood group established some new, more elaborate guidelines and name: the New York Stock and Exchange Board.
In 1863, the organization changed its name to the one it holds today: New York Stock Exchange (NYSE). And, to go along with its new title, it constructed its own building at 18 Broad St. after decades of occupying floors in other exchanges. It's still at that location today, now occupying the entire square block.
The fixed commissions that date back to the Buttonwood Agreement remained a feature of the Wall Street financial market until 1975, when the Securities and Exchange Commission (SEC) abolished them.
Signers of the Buttonwood Agreement
The two dozen men who signed the Buttonwood Agreement also put their addresses alongside their names (or their firms' names). They were:
• Leonard Bleecker - 16 Wall Street
• Hugh Smith - Tontine Coffee House
• Armstrong & Barnewall - 58 Broad Street
• Samuel March - 243 Queen Street
• Bernard Hart - 55 Broad Street
• Alexander Zuntz - 97 Broad Street
• Andrew D. Barclay - 136 Pearl Street
• Sutton & Hardy - 20 Wall Street
• Benjamin Seixas - 8 Hanover Square
• John Henry - 13 Duke Street
• John A. Hardenbrook - 24 Nassau Street
• Samuel Beebe - 21 Nassau Street
• Benjamin Winthrop - 2 Great Dock Street
• John Ferrers - 205 Water Street
• Ephraim Hart - 74 Broadway