The Stock Exchange from Within

by William C. Van Antwerp

It exists by virtue of the decree of October 7, 1900, regulating the execution of article 90 of the Code du Commerce and of the law of March 28, 1885, as modified by the decree of January 29, 1898. These laws provide that Agents de Change of the Paris Bourse must be French citizens over twenty-five years of age, and in possession of civil and political rights; they must be nominated by official decree signed by the President of the Republic. They must have performed their military service or satisfied the law as to such service, they must produce a certificate of fitness and good character signed by the heads of several banking and commercial firms. Agents de Change are, in reality, officers of the government, since the seventy ministerial appointees are entrusted with the exclusive right of dealing in government securities; all such dealings, in fact, when not made directly by private individuals, must be made through Agents de Change.

The enjoyment by stockbrokers of a complete monopoly under government is sufficiently unique to warrant an inquiry as to the origin of such a curious privilege. The employment of stockbrokers by persons who wished to sell certificates, or other negotiable instruments of the period, was made obligatory by an edict of Louis XIV in 1705. Twenty “offices” (memberships) of brokers in Paris were then created, and these twenty were accorded a monopoly similar to that of to-day. Prior to that period there had been “offices” of exchange brokers, bank brokers, and merchandise brokers, but the King felt that these were not contributing enough to the Royal exchequer and swept them all away in the edict of 1705, when the present system had its birth. The wars and the King’s extravagances had placed the exchequer in a bad way, and between 1691 and 1709, some 40,000 privileges of various kinds were sold for cash, among them the privilege under which these twenty men were to do the business of stockbroking in Paris. “Sire,” said Pontchartrain, “every time Your Majesty creates an office, God creates a fool to buy it.”

But the stockbrokers were not to remain in undisturbed possession of their new privileges, for, whenever the state of the Royal finances was low, the King withdrew the old offices in order to grant new ones, always for cash, to fresh buyers, and this was repeated again and again. Thus the next King Louis XV, whose personal follies, together with the schemes of the Scotchman, John Law,[120] brought the country to the verge of ruin, repealed in 1726 the Edict of 1705 and returned to it again in 1733. His successor, the weak and incapable Louis XVI, repeated this performance in 1785, 1786, and in 1787. In 1788, the stockbrokers having agreed to waive accumulated interest on their security deposits, were again established in their powerful monopoly. The critical financial situation that arose in the early days of the Revolution saw them again legislated out of office (June 27, 1793); the Bourse was closed, the stockbrokers arrested and their goods confiscated, because, in the imperfectly understood economics of the period, the decline in Frenchpaper currency (assignats) was attributed, faute de mieux, to stock-jobbing. Two years later the Bourse was opened again, and after eight days—the assignat continuing to decline, it was again closed. Meantime France went into bankruptcy.

In 1801 the modern Bourse was established and firmly fixed by the legislative work of the Consulate. The law then enacted requires that stockbrokers be appointed to their public trust by the government, which shall be guided in its choice by their moral character and their professional knowledge, and shall, besides, demand the pledging of a part of their fortune with the State as a guarantee of their good conduct and of proper expiation for their errors or failures. The law also emphasizes the principle of the freedom of commerce, expressly stating that nobody is obliged to have recourse to an intermediary, if he does not desire it. Further, the stockbrokers were subjected to several regulations with a view to prevent speculation and stock-jobbing. Thus, they were obliged to keep a journal; their books were to be marked and signed by the president of the Tribunal de Commerce; they could not trade nor carry on banking for their own account; no one who had been in bankruptcy was allowed to assume the duties of a stockbroker.

The law also makes the stockbroker responsible for the delivery of the securities sold and for the payment of the sums stipulated, even before either have been received by him from his clients, his security being appropriated for this pledge if need be. This responsibility was intended as a check upon transactions for future delivery, which, however, were made legal in 1885.[121] This law of 1801, it will be observed, provided that stockbrokers were to be appointed by the government, and that their commissions were subject to repeal. In 1816 they scored a great advantage by securing the enactment of a measure by which they were permitted to introduce their successors with the consent of the government. This “right of introduction,” says M. Vidal, “is practically an article for sale. The stockbroker, on retiring, does not sell his office (membership), but he sells to his successor the right of introduction.”

The price of this right in recent years has varied from 1,500,000 to 2,000,000 francs ($300,000 to $400,000). A candidate, proving satisfactory to the government, must in addition deposit 250,000 francs ($50,000) as a bond or security to the government, which pays interest on the deposit, and 120,000 francs ($24,000) as a fee to the caisse commune of the chambre syndicale, which means the treasury funds of the institution. The variations in the price of the “offices” or memberships have an interesting history. The first office sold was valued at 30,000 francs; about 1830 they rose to 850,000 francs; after the July Revolution they fell to 250,000 francs, and rose again to 950,000 francs before 1848. They declined at that time to 400,000 francs, and in 1857 reached 2,400,000 francs. After the war they fell to 1,400,000 francs.[122] In 1898, when the number of Agents de Change was increased from sixty to seventy under the government’s reorganization, designed to meet the expansion in business, it was provided that each of the ten new members should purchase the offices from the old members at 1,372,000 francs each.

While the stockbrokers, as I shall term the Agents de Change henceforth, are placed by law under the disciplinary rule of the Minister of Finance, they themselves, as an association, choose by ballot a governing board (chambre syndicale) of eight of their members, to whom, with a chairman (Syndic) are entrusted the maintenance of discipline, the listing of securities, and all general matters concerning the welfare of the body.

In addition to the exclusive privileges entrusted to stockbrokers as already cited, they are constituted the sole authority for the quotations of the securities in which they deal, including quotations of metals; they alone give the necessary certificates for transfers of government securities on terms provided by law; they regulate processes by which lost or stolen certificates are rendered non-negotiable or restored to owners; they may be commissioned by the courts to negotiate loans, to liquidate pledged securities, and to dispose of the property of minors. Settlement days in Paris are similar to those in London, occurring twice a month. That at the end of the month lasts five days, and that in the middle of the month four days. French rentes are settled only at the end of the month.

In forming partnerships, only one person in the firm is entitled to act as stockbroker; the other partners must be simply financial partners, responsible for losses, as “special” partners are in New York, to the extent of the capital contributed. The holder of the membership must be the owner, in his own name, of at least one quarter of the sum representing the purchase price of his membership, plus the amount of the bond or security given. Stockbrokers are forbidden by law to disclose the name of any person for whom they buy or sell; for this reason all dealings are made in the broker’s own names, as are also transfers. They must not, under any circumstances, carry on trading or banking operations for their own account, under penalty of expulsion. The bankruptcy of a stockbroker is prima facie a fraudulent bankruptcy, rendering him liable to arrest and other penalties, even under circumstances where an outsider would be immune.

While the impression prevails in many quarters that members of the Bourse are made responsible by law for any liabilities that may be incurred by their colleagues, such is not the case. The practice is, however, that the chambre syndicale, or governing body, voluntarily meets the liabilities of defaulting members from the general funds, although not compelled to do so. The nature of the monopoly which stockbrokers enjoy in Paris, and their position as officers of the French Executive government, renders this a thoroughly wise method, for, as we shall presently see, there is grave opposition to the exclusive rights entrusted to them, and it would not be good policy to fan the flames of this hostility by anything less than a mutual guarantee of solvency.