What is the Buttonwood Agreement

The Buttonwood Agreement was a document signed on May 17, 1792, representing an effort to organize the trading of financial securities, preceding the creation of the New York Stock Exchange (NYSE) .

This agreement was signed between 24 brokers, in front of Wall Street, n. 68. It therefore marks the establishment of that region as the financial center of New York City.

According to legend, the document was signed under a tree that, in English, is named Buttonwood; hence the name of the agreement would come. They also say that the 24 signatories met in secret two months earlier to discuss the terms.

The context of the Buttonwood Agreement

 

In 1790, the first US Treasury Secretary, Alexander Hamilton (who was also one of the federalists involved in the creation of the US Constitution) put up for sale $ 80 million in government bonds to help pay for the costs of the war. These bonds were sold to the public for $ 100 each.

Then the first share of Bank of the United States went on sale. Soon, other banks and insurance companies also released shares for trading, increasing the list of available financial securities.

At that time, paper purchases and sales were made openly, in auction rooms, offices and even coffee shops throughout New York City.

After a crisis in 1971, a financial panic broke out in March and April 1792, caused by the expansion of credit by the Bank of the United States and the high speculation of some prominent bankers. Financial commitments were not kept and corporate insolvency was a strong threat.

It was necessary to restore confidence in the market and, in particular, in the negotiation of financial assets. The Buttonwood Agreement was one of the responses taken to combat this scenario.

American brokers based the system they wanted to implement on the way European countries conducted their financial activities at the time.

What determined the Buttonwood Agreement

In short, the Buttonwood Agreement had two determinations. The first is that brokers should only trade with each other; the second, that commissions should be at least 0.25% of the value of the deal in question.

By closing the system to other participants, the intention was to create more confidence in the negotiations, in the sense that payments would be honored and assets sold would be legitimate. Furthermore, everyone who traded assets should follow the same rules.

The text of the Buttonwood Agreement

The text of the document was brief and to the point. In free translation, the Buttonwood Agreement said:

We, the signatories, brokers acting in the purchase and sale of financial securities, here solemnly promise each other that we will not buy or sell, from that day on, to any person, any type of security, for a fee of less than 0.25 % Commission on Value, and that we will give preference to each other in our negotiations.

 

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