What Is a Buttonwood Agreement?

The Buttonwood Agreement was made in 1792 between 24 stockbrokers and merchants on Wall Street in New York City in an effort to create a stock exchange. Rumored to have occurred under a buttonwood tree, the agreement marked the beginnings of the investment community of Wall Street.

Buttonwood Agreements Explained

The brokers based the U.S. system 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 created trust in the system whereby the brokers and merchants would only trade with each other while representing the public's interests. By closing the system, the participants would be assured that they could trust each other and that payments would be honored and investments were legitimate.

The Buttonwood Agreement was in response to the financial panic of 1792 whereby financial commitments were not honored, and fear spread that companies would not remain solvent. As a result, panic selling ensued until the government got involved and stemmed the panic. The Buttonwood Agreement was an effort to reestablish trust in the marketplace, and it is believed it's the forerunner to the New York Stock Exchange.