The Stock Exchange

by Charles Duguid

The first Stock Exchange was in the Royal Exchange. When the National Debt was organised by William III. at the end of the seventeenth century, in such a way as to render dealing in Government securities possible—there were few other securities in which to deal—business immediately began to be transacted, and as the Royal Exchange was the place of public business resort, it was there that men met to exchange stocks, and there that the profession of stockbrokers was established. There was no organisation except such as arose from the fact that every broker, whether in merchandise or stocks, had to be licensed by the authorities of the City of London. The stockbroker was so licensed, and formed one of the groups of brokers in the Royal Exchange. There were some who regarded the new profession and its methods with little favour, and as early as 1697 an Act of Parliament was passed to regulate stockjobbing—there was no distinction between stockjobbing and stockbroking in those days. Even the mercantile brokers of the Royal Exchange objected to the new group in their midst, very noisy and rapidly growing; they even questioned its respectability, and, as a result of all this, in the year 1698 there was a great exodus of stockbrokers from the Royal Exchange.

Some remained and others transferred their place of business to South Sea House, to the offices of the East India Company and of the Hudson's Bay Company. The great bulk of them, however, made Change Alley their market-place because of its suitable open space, undisturbed by traffic, and its convenient coffee-houses. Garraway's coffee-house became a very popular resort of the stockbrokers and their clients, and, to a greater extent still, so did Jonathan's. For the first three quarters of the eighteenth century, that is, from its beginning until the year 1773, Change Alley was the Stock Exchange. It was there that, in the year 1720, the scenes of the great Stock Exchange boom, panic, and collapse known as the South Sea Bubble were enacted.

In the year 1733 an attempt was made to abolish speculative stock transactions altogether by the passing of Sir John Barnard's Act. It rendered it illegal to buy stock for which one did not pay, or to sell stock which one did not deliver. It outlawed mere speculative transactions for differences. That Act was not repealed until 127 years afterwards, in 1860, but at no time was it seriously operative. It spread dismay throughout the ranks of the stockbrokers at first, because a great deal of their business naturally consisted in time bargains, enabling the payment of differences instead of cash or stock down; but the proverbial coach and four was soon at hand and the Act proved a dead letter.

In the course of the evolution of the profession of stockdealing, the more respectable of the brokers found themselves using Jonathan's, and by the year 1762 that coffee-house was almost regarded as the Stock Exchange, the other frequenters of Change Alley being looked upon more or less as outsiders. The aristocracy of the profession, who assembled at Jonathan's, was really the nucleus of the present Stock Exchange organisation. Amid the jealous sneers of some of their less reputable brethren, who charged them with an attempt to form an exclusive ring, they eventually, in 1773, raised a subscription, and obtained the control of a coffee-house at the north end of what are now called Royal Exchange Buildings—opposite the north-east corner of the Royal Exchange, where the Peabody statue stands. Over the door of this building was placed the inscription "The Stock Exchange." It was the first building to bear the title. But even to this building, the first Stock Exchange, admission could be obtained by the outsider at the cost of sixpence for a day ticket.

It was but a stepping-stone, however. At the beginning of the nineteenth century another subscription was raised amongst the evolutionists, this time to a capital of as much as £20,000; and the Stock Exchange was established with an exclusive membership, and with much the same constitution as exists to-day. The foundation-stone was laid in Capel Court on May 18th, 1801, and under a deed of settlement which had been drawn up, the Stock Exchange, almost as we now know it—although the deed of settlement was subject to modification in 1876 and again in 1882—was soon in full swing. At the commencement there was no definitely formulated code of rules, although the unwritten laws were generally well understood and recognised by the members; it was not until 1812 that a code of rules was actually printed.

Some straggling branches of the Stock Exchange profession remained outside for a time, but, in the course of years, they were practically all gathered in. For instance, a great part of the business in foreign stocks was transacted in the Royal Exchange until, in 1823, a Foreign Loan Exchange was established in a building adjoining the Stock Exchange. It had a constitution much the same as that of the Stock Exchange proper, with a Committee and so on, and it was eventually absorbed. Again, much of the business in the Funds was carried on in the Rotunda of the Bank of England from the year 1764, when the Rotunda was built—whilst the Stock Exchange was still in Change Alley—until the year 1838, when the brokers were expelled the Rotunda by the operation of a clause in the Bank Act of 1834. From that time the pre-eminence of the Stock Exchange as the market for the Funds became unrivalled, and there were some who complained that the Government in passing the Act did not, perhaps, realise that it was closing the only semblance of an open market for the transfer of the National Funds. There had been an attempt in 1810 to establish a National Fund Exchange, independent of both the Rotunda and the Stock Exchange, or failing that, to make the Stock Exchange an open market. A Bill was introduced to Parliament, but it never became law. Another attack on the status of the Stock Exchange was made in 1821, this time from inside. The Committee made an attempt to abolish option dealing; it actually forbade it by rule; whereupon many members, finding their occupation gone, subscribed money for the establishment of a rival institution, and the movement obtained such importance that the Committee, to save the situation, climbed down, rescinding its anti-option rule.

Two or three years later, the Stock Exchange, becoming overwhelmed with business, had little time to consider its own domestic affairs. The new company boom of 1824-5 added immensely to the scope of Stock Exchange business, and though, as is usually the case, a crash followed the boom, it left the Stock Exchange a much more important institution in the eyes of the public than it ever was before. For one thing, the newspapers began to publish a daily account of its transactions. The mania and panic of 1825 were repeated in 1835 and again in 1845, the cycles lasting just a decade. The boom and collapse of 1835 were connected with foreign loan issues, and in 1845 was the great railway mania.

In the middle of the century, in 1850, the number of members of the Stock Exchange was only 864, and the annual subscription was only £10. The Official List at that time contained the names of fewer than 300 securities; until 1843 it had been published not daily, but only twice a week. Soon after the middle of the century, the Stock Exchange was entirely pulled down and rebuilt. During the operation the members found a temporary home in the Hall of Commerce, which is now Parr's Bank, in Threadneedle Street. They assembled in their new building in March, 1854. Much agitation arose in 1860, both inside and outside the Stock Exchange, in favour of the fixing of a uniform scale of brokers' commissions. There were many meetings of members, but no more came of the agitation than has come of less serious attempts since.

The Companies Acts of 1860 and 1862, establishing the principle of limited liability, had naturally an important effect on business, and the speculation to which it gave rise aggravated the crisis of 1866, the Overend-Gurney crash. This cataclysm led to the passage of Leeman's Act designed to prevent sales of bank shares of which the seller is not possessed. The legislature recognised the distinction which exists between bank shares and all others, because of the delicate nature of banking business—depositors, seeing the shares falling, rush to withdraw their money, and thus spread ruin.

It was not until 1873 that the Stock Exchange Clearing House was established, although nowadays it seems strange that the business of the settlement could ever have been arranged without it. An attempt had been made to establish a Clearing House in 1851, but it came to nothing. Even in 1873 the Clearing House was launched under private auspices, and it was not until seven years later that it came under the official control of the Committee. The chief characteristic of the seventies, however, was the number of commissions and inquiries dealing with Stock Exchange affairs. There was the Select Committee on Foreign Loans in 1875, which made some remarkable disclosures as to the methods of borrowing by South American States; there was the Select Committee on the working of the Companies Acts in 1877, and in 1878 there was the Royal Commission to inquire into the affairs of the Stock Exchange itself.