What Is the Buttonwood Agreement?

The Buttonwood Agreement was a compact to create a stock exchange on Wall Street in New York City, signed by 24 stockbrokers and merchants in 1792. Legend says it was finalized under a buttonwood tree near what is now 68 Wall Street.

The agreement marked the creation 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.

Understanding the Buttonwood Agreement

The Buttonwood Agreement was a response to the Financial Panic of 1792. This intense, two-month period was precipitated by a liberal loan policy set by the new Bank of the United States combined with attempts by unscrupulous speculators to corner the bond market. When the scheme failed and the speculators defaulted, it caused a run on the banks and panic selling of securities.

Secretary of the Treasury Alexander Hamilton managed to contain the crisis by May 1792 by extending credit and cash to local banks. 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 safeguard investors' interests.

To that end, two dozen merchants and brokers—the creme de la creme of the New York business and financial community—gathered on May 17, 1792, reputedly under the shade of a buttonwood tree at what is now 68 Wall Street, to sign a written agreement they'd been discussing since March.

A Closed System

The Buttonwood Agreement essentially created a club whose members agreed to trade directly and exclusively with each other under some common rules and boundaries. By closing the system against outside agents and auctioneers, who at that time also conducted bond auctions and stock trades, participants gained confidence that they could trust each other, that payments would be honored, and investments were legitimate. And their clients could have the same confidence. 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 characterized the pact. “When you all know each other, why screw each other?”

What Did the Buttonwood Agreement Say?

The Buttonwood principals based their trading parameters on existing European systems at that time. The Spanish practice of dividing the silver dollar into eighths was largely responsible for the use of fractions in stock values.

The Agreement contained only 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

That meant brokers could have trust in the validity of the stock shares they sold, and that cutthroat competition over commissions would not arise.

The Button Agreement and the New York Stock Exchange

By creating a closed, members-only financial marketplace, the Buttonwood Agreement created the foundations of 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 a buttonwood tree, and they made the Tontine Coffee House at the corner of Wall Street and Water Street their center of operations.

Growth of the Industry

The securities industry continued to grow along with the country, 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 added more elaborate guidelines and a name: the New York Stock and Exchange Board.

In 1863, the organization changed its name to the one it holds today, the New York Stock Exchange (NYSE). To go along with its new title, it constructed a building at 18 Broad St. It's still at that location today, although it has expanded to cover the entire square block.

Signers of the Buttonwood Agreement

The two dozen men who signed the Buttonwood Agreement also put their addresses alongside their names or the names of their firms. 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

The Bottom Line

There's no buttonwood tree on Wall Street these days, but a fateful meeting under one in 1792 led to the creation of the New York Stock Exchange and the establishment of a securities industry in the young United States. In case you're wondering, a buttonwood tree is now more often known as an American sycamore. It was once harvested as an excellent source for wooden buttons.