This is an excellent, very readable history of the New York Stock Exchange from its nascence, in the 1790's, until just recently.  B. Mark Smith traces the efforts over that period by market officials and government regulators to restrict and punish the shenanigans that dishonest traders and companies can dream up and of analysts to try and figure out precisely what drives market valuation.  Steering a middle ground between the pessimism of Robert Schiller's Irrational Exuberance and the optimism of James K. Glassman's Dow 36,000, Smith seems to play the facts pretty straight and to cautiously advocate the view that the market, and specifically the value placed on stocks, has become increasingly rational over time.  The importance of his thesis, however gingerly proposed, becomes obvious when he makes the point that the Market has gone from being perceived as a somewhat crooked den of speculation to the single most important investment venue for the great mass of Americans.

This radical change has been so gradual that it is easy to ignore, but Smith's book makes it clear just how humongous a factor it is in modern life.  Consider for a moment the very real prospect that Social Security will, over the next generation, become a largely private, stock based retirement system.  At the time that Social Security was created, this idea would have been dismissed as a form of dementia.

The one weakness of the book, and it is a weakness of market forecasters in general, is that it largely ignores such political realities in analyzing stock values.  For the truth of the matter is that even if stocks are overvalued right now, three major factors are about to be brought to bear on the market :

    (1)    Tax Cuts :  Already well off, the American people will, over the next few years, be getting
    ever larger shares of their tax dollars back and that money is going to end up somewhere.
    Considering our already elevated standard of living, retirement accounts seem a likely destination.

    (2)    Permanently Balanced Budgets : Though it has virtually escaped the notice of most people,
    we face a situation where Federal bonds may cease to exist and where there is no competition from
    government for loan money.  This will both put tremendous downward pressure on interest rates
    and remove bonds as an investment vehicle.  Both will drive investors toward stocks.

    (3)    Privatization of Retirement : This process, already well under way, will see increasing
    reliance on 401k and similar types of retirement accounts, and the eventual transfer of Social
    Security accounts to private control.  Here too, investors are likely to seek the type of returns that
    only stocks can offer.

Add to these  : the growth of Free Trade; the rapidly accelerating movement of most nations toward free market capitalism; and the huge productivity still to be realized as the entire planet becomes computerized; and you have a recipe for a long term global economic boom and a favorable climate for stock investment as far as the eye can see.  Smith avoids such speculation, which allows him to be impartial in critiquing both Schiller and Glassman, but it is important to remember that the midpoint between two extremes is not necessarily correct simply because it is moderate.  Often the truth will lie much closer to one extreme than the other.  In this case, it seem likely that we'll see Dow 36,000 much sooner than we'll see a 1930s style collapse.  But even if..., it is also important to recall that if you bought stocks in the 1930s and held onto them, you would have become a very rich man.  In fact, in one of the most startling statistics in the book, Smith points out that if you bought the S&P 500 at the top of the market in 1987, despite the precipitous October plunge, you still would have realized a 13% return over the next ten years.  Of such stuff is rational exuberance made.

At any rate, this is a first rate examination of the growth of, and changes in, the stock market over its two hundred-plus years, particularly valuable for non-experts, like me, who are headed into a future where more and more of our wealth will be invested there.  And if Smith is a tad cautious, perhaps that caution is appropriate to a history book.

(Reviewed:21-May-01)

Grade: (A) Orrin C. Judd

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