STOCK EXCHANGES

STOCK EXCHANGES. Stock exchanges are formally organized secondary markets for financial assets that have already been issued in primary capital markets. Stock markets have become the hallmark of successful modern capitalist economies, despite the frequency of volatile price movements that lead to excessive speculation followed by panics and despite repeated scandals. They play an important role, however, for both the primary capital market and the mobilization of bank credit within any economy, basically by providing liquidity for the initial investors in government or corporate debt or in corporation stock. The assurance that a ready market exists for the sale of an investor's holdings in case of second thoughts, emergencies, or better alternatives for investment makes it easier to place debt or equity in the first place on the primary capital market. The daily pricing of all such financial products on a stock exchange also makes them ideal instruments as collateral for loans. In sum, stock exchanges are important complements to the efficient operation of the rest of an economy's financial sector.

The historical development of worldwide stock exchanges shows that three features are essential for their long-term success: a large stock of homogeneous, readily identified financial assets available to the public; a numerous and diverse customer base that is aware of the financial assets available; and a set of trustworthy intermediaries to handle trades of the various financial products among the customers.

The first feature arose with the creation of large-scale government debt, initially by Italian city-states such as Venice, Florence, and Genoa in the fourteenth and fifteenth centuries. While a secondary market of sorts existed, the city debts do not appear to have been widely held, as they took the form of forced loans from the wealthiest merchants and gentry. The second feature appeared with the creation of the joint stock of the Dutch East India Company or VOC (Vereenigde Oost-Indische Compagnie) in 1602, which was a forced amalgamation of a series of trading ventures organized within six different cities of the United Provinces. The existing shareholders were numerous and varied greatly in wealth and investment objectives; many were unhappy at the forced amalgamation and loss of voice in the management of the company. Active trading in the shares arose soon afterward, and a group of specialists in trading VOC shares appeared on the Amsterdam Beurs, which was the general wholesale market for commodities. According to de le Vega, these traders met in a corner of the exchange when it was open and continued business after hours in nearby coffeehouses. But this grouping does not appear to have had a formal organization or many other trading opportunities in other securities. Even though each city and province in the Netherlands issued large amounts of debt, each issue was closely held and seldom traded outside the city or province of origin. Not until 1795, when the Batavian Republic instituted reforms inspired by the French Revolution, did a regularly printed list of stock prices appear in Amsterdam, even though Dutch newspapers had reported prices of the leading securities since at least 1723.

In 1688, when Dutch financial techniques were grafted onto the English system of central government with parliamentary control over a constitutional monarch, the new British governments rapidly increased both their debt and the transferable stock of corporations holding government debt, such as the Bank of England, the New East India Company, and the South Sea Company. Despite the general collapse of share prices after the SouthSea Bubble of 1720, the customer base for English securities was large and increasingly diverse, comprising foreigners as well as provincial customers throughout England. Dedicated professional traders appeared who usually acted as brokers and often as dealers holding stock on their own account as well. Not until 1773, however, do we find documented evidence that they had a formal organization to assure confidence in trading with each other and on behalf of the general public.

With the substantial increases in government debt during the Napoleonic Wars, however, a formal exchange was created: the London Stock Exchange, with its self-regulated set of trading rules and information system. In response, the Paris Bourse, which had come under strict government control in 1726 after the collapse of the Mississippi Bubble in 1720, and then fell into disuse during the financial disruptions caused by the French Revolution, was revitalized by the French government and maintained under Napoleon. In the United States, the creation of federal debt in 1790 led to the appearance of the New York Stock Exchange, as well as other exchanges in Philadelphia, Boston, and elsewhere, eventually leading to over two hundred regional exchanges in the United States by World War I.

See also Banking and Credit ; Capitalism ; Commerce and Markets ; Interest ; Trading Companies .

BIBLIOGRAPHY

Dickson, P. G. M. The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756. London, 1967.

Garber, Peter. Famous First Bubbles: The Fundamentals of Early Manias. Cambridge, Mass., 2000.

Neal, Larry. The Rise of Financial Capitalism: International Capital Markets in the Age of Reason. New York, 1990.

t'Hart, Marjolein, Joost Jonker, and Jan Luiten van Zanden, eds. A Financial History of the Netherlands. Cambridge, U.K., and New York, 1997.

Vega, Josseph de la. Confusion de Confusiones. Translated by M. F. J. Smith. The Hague, 1939.

Vidal, Emmanuel. The History and Methods of the Paris Bourse. Washington, D.C., 1910.

Larry D. Neal