Professor W. T. Ashley, who cites this incident in his “Introduction to English Economic History and Theory” (London 1892), also gives another instance in which our modern theories of natural rights and freedom of contract seem to be in hopeless conflict. John-at-Wood, a baker, was arrested in 1364 charged with the profane practice of “bulling” wheat. “Whereas one Robert de Cawode,” the indictment reads, “had two quarters of wheat for sale in common market on the pavement within Newgate; he, the said John, cunningly and by secret words whispering in his ear, fraudulently withdrew Cawode out of the common market, and they went together into the Church of the Friars Minor, and there John bought the two quarters at 15½d per bushel, being 2½d over the common selling price at that time in the market, to the great loss and deceit of the common people, and to the increase of the dearness of wheat.” At-Wood denied this heinous offence and “put himself on the country,” whereupon a jury was empanelled, which gave a verdict that At-Wood had not only thus bought the grain, but that he had afterward returned to the market and boasted of his crime, and “this he said and did to increase the dearness of wheat.” Accordingly he was sentenced to be put in the pillory for three hours, and one of the sheriffs was directed to see the sentence executed and proclamation made of the cause of the punishment.
So far as I am aware the Statutes of Henry III and Edward I, under which these culprits were punished, constitute the earliest official attempts to repress speculation by law. After the Revolution, the Bank of England having been organized and bank shares created, a speculative outburst occurred that led to the enactment of fresh legislation entitled “An act to restrain the numbers and ill practices of brokers and stock-jobbers,”[78] but this law lapsed or was repealed ten years later. In 1707 a law was passed licensing brokers and making it unlawful for unlicensed brokers to do business,[79] and in 1708 City rules were established for brokers, obliging them to give bonds for the proper performance of their duties. In 1711, 1713, and 1719, laws were enacted similar to the Act of 1707.
Then came the speculative schemes of 1720, of which the most famous or infamous was the South Sea Company, designed to make fortunes for its shareholders in the slave-trade and in whale fishing. It was followed by many other projects almost fantastic in their wildness to each of which the public subscribed liberally. Where all the money came from that kept this disastrous speculative mania alive is something one would like to know. There seems to have been no limit to it. South Sea shares stood at 120 in April of 1720; in July they had reached 1020, and, after that, the collapse. The company became a “bubble,” and a burst one at that—and a great popular outcry followed. It resulted, in 1734, in the passage of Sir John Barnard’s “Act to Prevent the Infamous Practice of Stock-Jobbing,” the preamble reciting:
“Whereas, great inconveniences have arisen, and do daily arise, by the wicked, pernicious, and destructive practice of stock-jobbing, whereby many of His Majesty’s good subjects have been and are diverted from pursuing and exercising their lawful trades and vocations to the utter ruin of themselves and their families, to the great discouragement of industry, and to the manifest detriment of trade and commerce.”
This act forbade bargains for puts and calls, and also “the evil practice of compounding or making up differences”; but its principal provision was the prohibition of short selling under penalty of £100 for each transaction. There was, of course, an appeal to the courts, which held that the statute did not apply to foreign stocks nor to shares in companies, but only to English public stocks, a decision that effectually put an end to the usefulness of the law. It remained on the statute books, however, and it was occasionally resorted to by persons who sought to evade the fulfillment of their speculative contracts—a class of persons known to-day as “welchers.”
Finally, in 1860, the law was repealed altogether, the repeal act reciting that Sir John Barnard’s Act “imposed unnecessary restrictions on the making of contracts for sale, and transfer of public stocks and securities.” Thus the first serious attempt to regulate speculation in securities by law, and specifically to prohibit short selling, came to be recognized as a failure by the frank admission of government. In 1867 the so-called Leeman Act became law, prohibiting all sales of bank stock unless the numbers of the certificates sold were specified—an attempt to prevent short selling of bank stock. Even this law was subsequently repealed, and England, to-day, has no law on the statute books restricting speculation.
As the London Stock Exchange grew in influence and importance, reflecting England’s development as the world’s banker, popular attack and criticism continued to assail it. It may be frankly admitted that the legitimate functions of the institution had been abused by foolish or unscrupulous persons, just as every important branch of business and politics has been misused, the world over, since civilization began. The question therefore arose whether these occasional sharp practices proved the Exchange to be an excrescence on the body politic, or whether, on the other hand, its importance in the mechanism of modern business merely required improvements and reforms. In this situation, which occurred in 1877, and which caused considerable agitation on the part of both parties to the controversy, a royal commission was appointed “to inquire into the origin, objects, present constitution, customs, and usages of the London Stock Exchange.” The Exchange and its critics thus reached the parting of the ways. A year was spent by the commission in examining witnesses and conducting investigations along special lines, and in 1878 its report, with the evidence, was published in a Parliamentary Blue Book.
The report absolutely upheld the purposes and functions of the Stock Exchange and the legitimacy of speculation in securities, and it went further in pointing out the danger of attempting to force any form of external control on the institution. The evils of that form of Stock Exchange speculation which closely approaches mere gambling were plainly stated, and the report suggested that the Exchange authorities restrain such practice in so far as was possible.
As the conclusions of the royal commission are of very great importance, marking as they do the first serious official study in modern times of the Stock Exchange theory, I quote from the Blue Book in the hope that Stock Exchange critics of to-day may understand how these conclusions were reached. “In the main,” reads the report, “the existence of the Stock Exchange and the coercive action of the rules which it enforces upon the transaction of business and upon the conduct of its members has been salutary to the interests of the public. We wish to express our conviction that any external control which might be introduced by such a change should be exercised with a sparing hand. The existing body of rules and regulations have been formed with much care, and are the result of the long experience and vigilant attention of a body of persons intimately acquainted with the needs and exigencies of the community for whom they have legislated. Any attempt to reduce this rule to the limits of the ordinary laws of the land, or to abolish all checks and safeguards not to be found in that law, would, in our opinion, be detrimental to the honest and efficient control of business.”
In 1909 similar criticism in New York having led to the appointment of the Hughes Commission to inquire “what changes, if any, are advisable in the laws of the State bearing upon speculation in securities and commodities, or relating to the protection of investors, or with regard to the instrumentalities and organizations used in dealings in securities and commodities, which are the subject of speculation,” the commission reported to the Governor, after six months of laborious investigation, in these words: