Threats to take the floor

The London Stock Exchange
September 29, 2000

The London Stock Exchange has been in turmoil this year. Earlier this month a possible merger with its German equivalent collapsed; it faces a hostile takeover bid from Sweden's OM Group; and with the recent merger of the Paris, Amsterdam and Brussels exchanges to form Euronext, a French-led European stock exchange, London has another potential partner. There are also stories of overtures being made to another, this time US exchange (Nasdaq), that is considering setting up in London and taking away some business by the legitimate means of competition.

All of this has set people asking what it is that can be merged or wondering about who has the right to do what. This book will provide answers (and more) and tell them too how it got to be the way it is.

A shares market has existed in England from at least the 17th century. Most of the devices that are around today - futures contracts, hedging, bulls, bears, buy-and-sell options and so on - were there in the early 1600s. Yet some people, even those working in the City, think these are imports from the United States. But a market in shares is not an exchange, and Ranald Michie is at pains to point out that an exchange is "a market where specialised intermediaries buy and sell securities under a common set of rules and regulations through a closed system dedicated to that purpose".

Michie argues that without organised markets there was little incentive to issue or trade securities. The motto "my word is my bond" actually meant that in an organised and regulated market a failure to honour a sale could be punished, and was, by a fine, a suspension or even expulsion. So a stock exchange differs from a securities market. Thus defined, the London Stock Exchange, established in 1801, was the first modern stock exchange. But the activity of trading in stocks and shares, be it in an organised and regulated institution or in an open and uncontrolled way, has never been popular.

In his recent book on the City, David Kynaston cited Conrad Russell's view in the 1920s. Russell abandoned the City to be a small farmer in Sussex and wrote: "I like the feeling that the production of food is useful and honourable. I don't think a place like the Stock Exchange ought really to exist." Like many others before him, he seemed not to understand what it did. Michie cites an anonymous commentator writing from as early as 1716 about "the vermin called stockjobbers, who prey upon, destroy, and discourage all industry and honest gain", and who advocated the banning of transferable securities. He would have been in the crowd with a balaclava in Seattle last year and Washington last April.

Michie has written extensively about stock exchanges, particularly in England, but also in other countries and different periods. He is an authority. The story begins in 1693, when transferable debt was first created. The first century or so is dealt with briefly. The next half-century from its modern establishment in 1801 to 1850 gets slightly more, and the golden age up to 1914 more still.

Up to 1913 there was an open policy on admissions. Thereafter, the exchange turned protectionist and greatly restricted entry. This had in part to do with the first world war and the anti-German feeling that was encouraged. The amount of space given to the years from 1914 to the present is much greater, and each decade gets a roughly equal showing. The only surprise here is the relative neglect of the collapse in the market after 1929.

Because of the nature of the institution and its business, the story ranges over most aspects of the economy. There are the obvious links to individual industries seeking financial backing. There are issues relating to the sources, objectives and merits of regulation, not least those relating to the exchange itself. There are questions on macro-economic policy deriving, for example, from the scale of the national debt and its decline after 1820. There are also important issues relating to the process of financial liberalisation over the past 50 years.

Michie makes a strong case for the abolition of exchange controls in 1979 paving the way for far-reaching changes in the process of globalisation. These were much more profound than those responsible for abolition ever thought about. He writes: "There is nothing to suggest that the Conservative government was even remotely aware that the ending of exchange controls in 1979 had implications for the stock exchange." But abolition mattered directly for the exchange. The ending of controls destroyed its ability to monopolise its own domestic market and impose its rules and regulations.

Perhaps one opportunity has been missed, for there are no figures showing how the markets moved over long periods. When were the biggest rises and falls, and so on? There are no tables giving the main movements in any of the indices that are available from the beginning of the 19th century. With all the excitement surrounding booming and collapsing internet stocks at the beginning of a new century and interest as to whether and when such excitement occurred in the past, this would have been an opportunity to fill in some detail. But that is a quibble because this is a fascinating and well-told story that should have wide appeal.

Forrest Capie is professor of economic history, City University.

The London Stock Exchange: A History

Author - Ranald Michie
ISBN - 0 19 829508 1 and 924 255 0
Publisher - Oxford University Press
Price - £65.00 and £18.99
Pages - 672

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