The Corner

(This is the second in a four part series on the development of stock exchanges.)

During the 1400s the capital markets grew significantly. In 1463 Louis XI of France granted the Lyon trade fair a range of privileges which made the city irresistible for all European merchants: there were no fixed rates of exchange, and capital could be moved with no intervention by the state. As a result, a true exchange fair came about known as the “foire de change.” The Italian Florentines, the Genoese and the merchants from Lucca, conducted all their dealings in bills of exchange by public outcry. Their offers were accepted or protested. What was very important was to agree on the open market about interest rates and exchange rates. Despite the complicated process, the similarities with modern stock market trading in foreign exchange and fixed-interest bearing securities were obvious.

The church was not in a position to complain about an infringement of the prohibition of usury resulting from all these activities because the merchants who were due to pay the interest had “hidden” it in conveniently agreed rates of exchange of the currencies in use in Genoa and Gent, Lubeck and Lisbon, Bergamo and Bruges. The church, however, did not think in the slightest about complaining. In the wake of the Crusades, the church’s method of collecting offerings was reformed so that enormous amounts of money for the curia could be collected and moved. At this time the Reformation was still to come and the church meant the Catholic Church. The curia, the central institution of the church, was based in Rome, and at one point in Avignon, when the pope placed himself in the protection of, and made himself dependent on, the French crown. Various counter-popes were just as acquisitive of the money of the faithful. Whether pope or counter-pope, all made use of cashless transactions, right across Europe. Even the payment transactions of the curia, the first pan-European power, helped the bill of exchange—originally devised only for the financing of goods transactions—to become an object of trade in itself alongside other debt notes from dukes, cities and states.

During the late 16th century the word “bourse” was use as term to describe a stock exchange. The word is still used in Europe to this day. Historians generally have two explanations for it. Some say it came from the Latin word bursa, meaning leather bag. Others claim that the name of the merchant family in Bruges—Van der Buerse—whose coat of arms incorporated three leather bags. So it comes to no surprise that in Bruges in 1409 the first stock market was established as an institution. Another started up in Antwerp in 1460 and one in Lyon shortly afterward.

Until well into the 18th century, the stock exchanges bore little similarity to those of the today. The exchange of goods and their financing were the main activities for these markets. Generally, agricultural produce was bought and sold. The fish market in New York was where some of the first trading in securities took place. Trading solely in securities, which was undertaken only by speculators, played a secondary role, except at Lyon. Anything else would have been difficult because trading on modern stock markets involves the transfer of absent goods (today securities are often referred to as intangibles).

If the goods are not present, trading can only work well provided their quality is roughly the same. In addition, the trading customs and practices must be sufficiently well established for buyers to place their trust in the institution: those who daily expect to be cheated do not invest. Good bourses require categories of trade: it is necessary for them to ensure that the traders are solvent and possess a minimum of competence, reliability and honesty (at least among their fellow traders). The New York Stock Exchange was from the very beginning functional because the founding members had privileged trade among themselves and so in practice excluded all outsiders from dealing on the stock exchange. As long as they conducted business this way, they knew what kind of trading partner they were dealing with.

The skills of stock exchange dealers become ever more important when only securities are traded. Until well into the 19th century, anyone who wanted to trade on the floor of the stock market could do so in numerous exchanges. No checks were made to see if an individual was financially sound, if he understood the workings of the stock exchange. The openness of the stock markets in those early days contributed to many of the dramatic advances, crashes and scandals.

According to Dutch historian professor Dr. Joh Vries, “With real trade came the speculative activity then known as stock-jobbing, a picture of which is contained in De la Vega’s 1688 book “Confusion de Confusiones,” the important work on the institution of the stock exchange, in which all the artifices of the traders—who often formed boom and slump consortia—are described.” Check in next week for more.

Quote of the Week: “If you can keep your wits about you when others are losing theirs, you have half the battle won.”—Carlson

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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