From King William III’s empty coffers in the eighteenth century to David Cameron’s ‘big, open and comprehensive offer’ in the twenty-first, penniless governments have had to go cap in hand to the markets. Stock exchanges have always been on hand to help out, though not at any price, and states have assisted by settling matters of morality and legality in the expanding domain of finance. This episode unpicks the complex relationship between markets and state and wonders whether there’s anything positive for our building project.
I first noticed it in May 2010, on the sixth, to be exact.
If you are listening in the UK you might remember 6 May as the day of a general election, the day when Labour Prime Minister Gordon Brown was voted out of power. It was not a decisive defeat for Brown, nor a victory for anyone else. David Cameron, as leader of the Conservative party, looked set to form a minority government. Stock markets seesawed with anxiety, posting big losses on the morning after the election. Markets like certainty, the pundits said, so Cameron did something else.
Yes, he made Nick Clegg and the Liberal Democrat party a ‘big, open and comprehensive offer’ to share in a coalition government. The rest, as they say, is history and a very distressing one at that. Such moments matter. John Rentoul, writing in the Independent, wonders how things might have gone differently; he sketches out an alternative story where Clegg joins forces with a Labour Party revived by new leadership. ‘If Clegg had made a different choice,’ he writes, ‘we would be living in a different country now: slightly better off, with better public services, and probably still in the EU. I think that’s true. But could Clegg have done so? I’m not sure. My recollection of those moments is the extraordinary prominence given to the sentiments of the financial markets. It seemed that the force driving politicians to set up this bizarre, ideologically incompatible coalition – one that would ultimately destroy the Liberal Democrats as a third party in British politics – was not a concern to properly serve the British electorate and represent its wishes but an overwhelming need to pacify the markets. This was how it was reported during the tense days that followed the election. In the Telegraph, 9 May: ‘The Conservatives and Liberal Democrats last night sought to reassure financial markets that they are close to agreeing an economic deal that would allow David Cameron to take power.’ On 10 May the Financial Times reported that “both the Conservative and Liberal Democrat leaders want to strike a deal as soon as possible to reassure both the public and the financial markets that a stable government can be formed quickly.” It seemed undignified, these leaders scurrying to shake hands to keep the market happy. Don’t forget, this was not yet two years since the British government had been forced to throw half a billion pounds sterling at the banks to stop them collapsing and taking the infrastructure of global civilisation with them. One might have been forgiven for thinking that financial markets did not know anything about anything, let alone the crucial matters of government…
Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns? In the last episode, I opened up one of the first key ideas for our building project: that stock exchanges are embedded in history and in the material architectures that make them work. The two are related, of course. We saw how Chicago’s great stockyards led to the birth of a market in financial abstractions, and how that market was shaped by new technology in the form of the tickertape, and by the successive buildings that housed it. But today: how did finance become so important?
You’ll have to forgive me. I’ve got Brexit on my mind. As I sit writing this, it is eight days, seven hours, 40 minutes and 14 seconds to Brexit. In the time it took to type that, it’s dropped to 39 minutes. (Between writing and recording, we seemed to have gained a fortnight). In the first episode of this podcast I argued that financial markets should bear their share of responsibility for populist politics and Brexit. I suggested that markets have been used as a mechanism for squeezing labour to give to capital, through shoddy employment practices and an exclusive focus on the claims of shareholders. But these newspaper commentaries – Cameron and Clegg rushing to placate the angry market – suggest a much more direct link. It came down to money, of course. After the financial crisis, Britain was broke: the only source of money was international borrowing accessed through the bond market. Playing to the market was like sucking up to the bank manager to avoid having your house repossessed. Just as old school bank managers were trained to look out for flashy clothes and extravagant spouses as an indicator of financial intemperance and thus poor credit quality, so the British government was forced to promise a financial parsimony that manifested itself in austerity.
Financial markets shaped the run up to that election, the crucial days afterwards, and a long slog through a cruel and wrongheaded economic policy that has taken us to the brink of political self-annihilation.
I found that countdown timer, in case you are wondering, on a trade-the-markets website – even in adversity there’s opportunity. At least, for some of us.
—– Timer noise
It would seem reasonable to ask, then: how did financial markets get so important? That’s what I’ll be looking at today, and is a second key theme of this podcast – the relationship between markets and states.
We saw last week how the Chicago Board of Trade grew out of agricultural wealth as a political project among the city’s elite. While we might think of stock exchanges as dislocated and global, the truth is quite the reverse. As the statues in the Board of Trade’s old trading room suggested, the interests of politics, state and commerce have always been intertwined in the stock exchange. Take London, for example.
London’s market is much older than that of Chicago. The journalist and historian Elizabeth Hennessy suggests that in January 1698 one John Castaing began publishing a list of commodity and foreign exchange prices, from what he quaintly described as his ‘office at Jonathan’s Coffee House.’ Not so different from those techno-start-ups grandly headquartered in the local Starbucks, I suppose.
Jonathan’s Coffee House was located on the city’s Exchange Alley. Garraway’s was another such in the same street. Exchange Alley was a dangerous place, full of pickpockets and unscrupulous brokers as well as honest ones. One took one’s money, and possibly more, in one’s hands when venturing into London’s fledgling stock-market. Stock market traders had been settling themselves in these spaces after spilling out of the Royal Exchange, the City’s new commodities market. They may have been more thrown out than spilled out: they were numerous, noisy and disruptive, and trading in stocks did not have the cache of trade in the more visible commodities of the Exchange. Someone who traded stocks purely for speculation became known as a jobber (a title that lasted until October 1986!), snarkily described by Dr Johnson as “a low wretch who makes money by buying and selling in the funds.” So how did it become respectable?
A great deal happened in a short space of time. According to Ranald Michie, the definitive expert on the history of the London Stock Exchange, there was at the end of the seventeenth century a massive increase in the popularity of tradable stocks. ‘Before 1689,’ he writes, ‘there were only around 15 major joint‐stock companies in Britain, with a capital of £0.9m., and their activities were focused on overseas trade, as with the Hudson’s Bay Company or the Royal African Company. In contrast, by 1695 the number had risen to around 150 with a capital of £4.3m.’ (As always, full references for the sources quoted are in the transcript on the podcast webpage). Twenty five years later, during the boom that became known as the South Sea Bubble, a further 190 entities were proposed, hoping to raise £220 million from overexcited shareholders. That’s a five-fold increase in capital over as many years, and an expected two-hundred and twenty fold increase over three decades.
A joint-stock company, by the way, is simply what we would call a corporation, a legal entity with shares that can be traded independently of the firm. Among the earliest was the now-notorious East India Company, set up by Queen Elizabeth I’s Royal Charter on New Year’s Eve of the year 1600. As Michie points out, the financial structure of these firms suited risky endeavours in overseas trade or finance rather than steady investment at home, and the stocks remained specialist investments. There were legal problems, too. Financial assets were still construed as a kind of debt and therefore understood as ‘choses in action’, a legal category attached to the person of the debtor and not easily transferable; the sociologists Bruce Carruthers and Arthur Stinchcombe, who have written on the topic, identify a John Bull, who traded 13 times between 1672 and 1679 as the most active trader in Royal Africa Company stock. Dutch merchants had found ways round these obstacles already, however, and when a Dutch king, William of Orange, ascended to the English throne in 1689 laws and practices swiftly changed. The absorption of Lex Mercatoria, or medieval merchant law, into English law accompanied by specific regulatory changes – Carruthers and Stinchcombe cite the 1704 Promissory Note Act – made financial contracts freely tradable. Brokers and jobbers began to use standardised contracts, making the business of trading more straightforward. But the problem remained that few would actually want to buy these securities: they were too illiquid, exotic, too risky.
That changed in 1693 when the government launched its national debt, a permanent but transferable, relatively safe, interest-bearing security. Until this time, government debt had been short-term, borrowed when the need arose and paid off when it fell due; it took the form of lottery tickets and annuities, none of which could easily circulate on a market. This new kind of debt allowed the English government to finance its ongoing series of wars in Europe and the colonies and led to a massive expansion in the amount of securities available to trade. Some of the biggest joint-stock corporations, notably the Bank of England – formed in 1694 – the East India Company, and the South Sea Company, started to recycle this debt through their own shareholdings. The corporations lent their entire paid-up capital to the government – huge sums at the time. That capital came from shareholders, so you can think of money going through the corporations like a pipe – from private shareholders into the firm and out the other side to the government, with interest payments flowing back the other way. Where the government stock remained relatively illiquid, the shares of the corporations could now be easily traded in Exchange Alley. Volume grew. To give an idea of the expansion in trade, 1720 – the height of the stock market boom – saw 22,000 transactions. Compare that to Mr John Bull and his 13 trades, just 50 years earlier. Investors understood that these stocks were effectively government backed, making them a much safer bet. New financial organisations such as insurance companies and banks, which needed to generate returns on capital held but at the same time remain able to draw on it, started to buy and sell the stocks, as did merchants holding cash between adventures. According to Michie, tradable securities made possible a secondary market in rights to payment abroad. One such right might be created, for example if a British owner sold the stock overseas to a foreign investor, and the right could be sold in Britain to a merchant needing to make a payment in that same country. These bills of exchange thereby formed the basis of a growing global monetary system and which was in return inextricably linked to the activities of the market traders. The joint-stock companies had formed an essential conduit between the needy Exchequer and the fat purses of the English merchant classes. The national debt was born, and the London’s market emerged as an essential adjunct to government policy, a sort of primitive money laundering device for the bellicose national government throughout the eighteenth century. Markets and states have been inextricably linked since the beginning.
—– Crowd trading sound
Carruthers and Stinchcombe have shown that liquidity – the basic precondition of a functioning market – is a considerable organisational achievement. It depends, they argue, on the existence of three mechanisms: continuous trade of some kind, the presence of market-makers who are willing to maintain prices in whatever is being traded, and the presence of legally specific, standardised commodities. We have seen the last of these three conditions met: the creation of securities, the trade in which was both legal and desirable. And, as we have seen, with bureaucratic obstacles out of the way, merchants began to gather in Exchange Alley. These jobbers were the first ‘market-makers’, merchants who took risks in buying and selling stock in return for profits and in doing so made it possible for those who wish to trade on an occasional basis to do so. Traders came from all over Britain and even from Holland to set up in the market. It wasn’t just Dr Johnson who disliked them. Michie makes clear that contemporaries simply could not understand a market that traded continuously in these abstractions. He quotes an anonymous diatribe from 1716:
‘the vermin called stockjobbers, who prey upon, destroy, and discourage all Industry and honest gain, for no sooner is any Trading Company erected, or any villainous project to cheat the public set up, but immediately it is divided into shares, and then traded for in Exchange Alley, before it is known whether the project has any intrinsic value in it, or no…’
The 1697 Act to limit their numbers had not achieved much, so Parliament tried again. The Barnard Act – promoted by Sir John Barnard and passed in 1734 aimed to ‘prevent the infamous practice of stock jobbing’. Though the act was almost entirely ineffective it did have the consequence of rendering “time bargains” as illegal. Classed as gambling debts, they were now unenforceable through the courts and this meant that the traders themselves had to develop a code of self-protection.
A first attempt at shutting out undesirables came in the form of a subscription-based club that, in 1761, took over Jonathan’s Coffee House as their sole place of business and excluded non-members. One such non-member successfully pleaded in court that he had been unfairly shut out of the market, and the clique was broken open. In 1773 another group of brokers opened a building on Threadneedle Street on more legally favourable terms. Michie notes that ‘admission to this building was on payment of 6d. per day, so that all could participate if they wished… a broker attended six days a week all year the cost would be £7.80 per annum, which was remarkably similar to the £8 which was to be paid to Jonathan’s. Clearly,’ he writes, ‘that offer had made a group of the wealthier stockbrokers realize that they could personally profit by setting up an establishment for the use of their fellow intermediaries and then charging them a fee for its use’. Ironically, the same circumstances that had made the Threadneedle Street site available challenged its dominance: the Bank of England, which expanded hugely throughout the century due to its role in managing the government debt, was developing its own buildings and buying up land around the site, partly to control the risk of fire. At the centre of this development was the Bank’s Rotunda, which rapidly became a popular venue for the trading of stock. According to historian Anne Murphy the market took over and disrupted the bank’s space, filling it not just with jobbers but also pickpockets, street sellers, and prostitutes. Would-be customers were enjoined to walk into the melee and call out ‘lustily’ what they want, and they will immediately be surrounded by brokers.
It was the war with France at the end of the 18th-century that finally secured London’s dominance as a financial centre, both through the damage done to European bourses and the enormous demand for money on the part of the British government. So if we’re wondering why Messrs Cameron and Clegg could be seen whispering about what the market demanded like schoolboys hiding from the playground bully, we can see at least that this is nothing new. The stock exchange evolved as an instrument to support government, but on its own terms – like the useful sidekick in a drama who end up pulling all the levers. As the London example shows, however, some contemporaries found these new trading practices hard to swallow. That hasn’t changed, and the relationship between markets and states is also a struggle over the accepted norms of market practice. From Aristotle onwards, thinkers have tried to distinguish between legitimate trade in things we need and the pursuit of profit for its own sake. We see this in characterizations of jobbers as wretches, vermin and villains, and in the Barnard Act’s attempt to ban ‘time bargains’. Eventually that can only be settled by rule of law – although as the experience of London’s lawmakers shows, attempts to stand simultaneously in the way of economic and social pressure will be futile. It is always complicated.
You will recall from the last episode how the concentration of agricultural power and communication networks on Chicago led to the formation of the Board of Trade, and then rapidly to the advent of ‘to arrive’ contracts, trading in financial abstractions of agricultural commodities and in doing so offering farmers the chance to protect themselves against changes in the price and the weather. As in London, where jobbers had been trading in time – those bills of exchange – since the seventeenth century, the market depended on a class of professional speculators. Trade in financial abstractions exploded at the end of the nineteenth century. Jonathan Levy, the University of Chicago historian who has chronicled the legal wrangling over derivatives trading, states that 8.5 billion bushels of wheat were sold at the New York exchange between 1885 and 1889. During the same four years, the city consumed only 162 million. Levy shows how derivatives trading only became morally – and legally – acceptable after a long dispute – a culture war over the soul of the market.
While it’s impossible to do justice to the subtleties of Levy’s study, a broad brush picture is still illuminating – and my thanks also go to Andrea Lagna of Loughborough University for suggesting this trajectory.
At root, the dispute came down to a few core principles. The first was the question of gambling. Traders – known as scalpers – had developed a technique called ‘setting off’, allowing them to settle a deal at any point before the agreed delivery date; they did so, of course, when the price moved in their favour. Setting off was just another step in an evolution of contracts that had begun with abandoning physical exchange and instead swapping ‘elevator receipts’, tickets representing grain in one of the city’s many silos, or elevators. Soon enough the traders abandoned all pretence of a physical commodity. This begged the question of what they were trading: the winds of Minnesota, rather than its wheat, according to one grain handler. Court cases pursuing settlement hinged on just this point – a transaction could only be legitimate if there was a genuine intention to transfer the goods. Speculation for its own sake was too close to gambling, and the courts sought to distinguish between those who had a legitimate interest in risk management and those who simply sought to make money from trade. But this wasn’t just a moral issue. It was also a dispute between those involved in the growing and shipping of physical commodities, and the pit traders. It was about the very nature of work. According to the farmers, the ability to set prices for crops grown on the land was a right ‘as old as civilisation’, a right of which they were now being cheated. They sought to contrast the toil of cultivation and the heft of their products with the ephemeral, speculative abstractions that circulated in the pit. Theirs was a labour, while the work of the pit was a game of chance. The speculators responded by stressing the mental efforts involved in their work, and emphasising its role as a responsible risk-management practice. Here they echoed the promoters of life assurance in the United States who had faced similar moral objections to wagers on time, life and death. The traders also offered a more pragmatic defence: the genie was out of its box, and the abstractions could not be un-thought. If the pits were closed by American legislators these ghosts of commodities would simply circulate elsewhere. The futures market had forever uncoupled the productive and financial circuits of the economy. ‘In the pits,’ writes Levy, ‘speculative trade in incorporeal things stood newly naked before the wider public’.
—— Ticker sound
Ironically, it was the public’s involvement that led to an eventual settlement of the dispute. The growth in futures trading had been accompanied by the rise of so-called ‘bucket shops’, betting establishments where the public could trade on the fluctuations in commodity prices. Like the brokers rooms, the bucket shops were also connected to the market by ticker machines, but no orders were fed back to the pits, and the public betted against the proprietor’s book on the outcome of market moves. The shops also catered to small farmers seeking to insure themselves against changes in prices or failures in the weather and whose orders would have been far too small for the scalpers to take seriously. I’ll come back to the bucket shops in a later episode. What matters here is a court action taken by CC Christie – a bucket shop magnate – against the Board of Trade, which was seeking to close down its upstart competitor. The shops had been so successful that they were draining business from LaSalle Street, and the board cut a deal with Western Union Telegraph Co to prohibit the distribution of prices. Christie sued, and in 1905 the case arrived in front of Justice Holmes of the Supreme Court. Holmes’ decision went against the shops. He held that they were sites for speculation, while the pit traders were legitimate dealers and ‘setting off’ constituted a legal delivery. Moreover, he said, this kind of speculation, ‘by competent men is the self-adjustment of society to the probable’. At a stroke, derivative trading had become not only legitimate but desirable in the eyes of the law, and Holmes had articulated a new role for the markets – managing risk – that becomes increasingly important as the twentieth century draws to a close. That’s for another episode.
Where does that leave us? The clock ticking down to Brexit, and at least a portion of the blame going back to a few fateful days a decade ago, when politicians trembled before the mighty financial markets. Would they have acted otherwise without this need to placate the bully, to oil up to the bank manager? I can’t say. But what we can see is that stock exchanges and states have since the very beginning enjoyed a queasy co-existence, one with the money, the other with the laws. And we can also see what there isn’t: no guiding hand, no purposive action, just the summing up of endless squabbles, power plays and battles for mutual advantage. That’s not a very optimistic thought for our building project, I have to say.
But let’s press on. Next week we’ll be back to the present day, and thinking about some of the things that a stock exchange could be doing, if we don’t agree with justice Holmes: what are they actually for?
I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on email@example.com. Thank you for listening, and see you next time.
 For the lending criteria of old school bankers, see Ingrid Jeacle and Eamonn Walsh, “From Moral Evaluation to Rationalization: Accounting and the Shifting Technologies of Credit,” Accounting, Organizations and Society 27 (2002).
 Sound recording from ‘Ancorapazzo’ via freesound.org, under an creative commons attribution licence from https://freesound.org/people/ancorapazzo/sounds/181630/
 Elizabeth Hennessy, Coffee House to Cyber Market: 200 Years of the London Stock Exchange (London: Ebury Press, 2001).
 BG Carruthers and AL Stinchcombe, “The Social Structure of Liquidity: Flexibility, Markets and States,” Theory and Society 28 (1999).
 Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146267/
 Ranald C. Michie, The London Stock Exchange: A History (Oxford: Oxford University Press, 2001), 23.
 Anne Murphy, “Building trust in the financial market”, Critical Finance Studies, University of Leicester, June 2017.
 Jonathan Ira Levy, “Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905,” The American Historical Review 111, no. 2 (2006).
 Viviana A. Zelizer, The Social Meaning of Money (New York: Harper Collins, 1994).
 Levy, “Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905,” 316.
 Sound recording from ‘Timbre’ via freesound.org, under a non-commercial creative commons licence https://freesound.org/people/Timbre/sounds/148893/