term stock returns have displayed such stability despite the radical
political, economic, and social changes that have impacted the world
over the past two centuries.
Yet one must be aware of the political and legal framework in
which these returns were generated. The superior returns to equity over
the past two centuries might be explained by the growing dominance of
nations committed to free-market economics. Who might have expected
the triumph of market-oriented economies during the Great Depression
of the 1930s and the tumult following World War II? The robustness of
world equity prices in recent decades might reflect the emergence of the
golden age of capitalism—a system in ascendancy today but whose for-
tunes could decline in the future. Yet even if capitalism declines, it is un-
clear which assets, if any, will retain value. In fact, if history is any guide,
government bonds in our paper money world may fare far worse than
stocks in any political or economic upheaval. As the next chapter shows,
the risks in bonds actually outweigh those in stocks over long horizons.APPENDIX 1: STOCKS FROM 1802 TO 1870
The first actively traded U.S. stocks, floated in 1791, were issued by two
banks: the Bank of New York and the Bank of the United States.^21 Both
offerings were enormously successful and were quickly bid to a pre-
mium. But they collapsed the following year when Alexander Hamil-
ton’s assistant at the Treasury, William Duer, attempted to manipulate
the market and precipitated a crash. It was from this crisis that the an-
tecedents of the New York Stock Exchange were born on May 17, 1792.
Joseph David, an expert on the eighteenth-century corporation,
claimed that equity capital was readily forthcoming not only for every
undertaking likely to be profitable but also, in his words, “for innumer-
able undertakings in which the risk was very great and the chances of
success were remote.”^22 Although over 300 business corporations were
chartered by the states before 1801, fewer than 10 had securities that
traded on a regular basis. Two-thirds of those chartered before 1801 wereCHAPTER 1 Stock and Bond Returns Since 1802 21
(^21) Until recently, the oldest continuously operating firm was Dexter Corp., founded in 1767, a Con-
necticut maker of special materials that was purchased in September 2000 by Invitrogen Corp. The
current oldest is Bowne & Co. (1775), which specializes in printing; the second is Wachovia Bank,
which acquired First Union, the successor of the First National Bank of Pennsylvania founded in
1782; and the third is the Bank of New York Corp., founded in 1784, which was involved in the suc-
cessful 1791 stock offering with the Bank of the United States that was eventually involved in the
crash of 1792.
(^22) Werner and Smith, Wall Street,p. 82.