Published by EH.NET (August 2000)

Ranald C. Michie, The London Stock Exchange: A History. Oxford: Oxford

University Press, 1999. xiii + 672 pp. $110 (cloth), ISBN: 0-19-829508-1.

Reviewed for EH.NET by Larry Neal, Department of Economics, University of


Among financial historians, it is now commonplace to regard the emergence of

today’s global capital market as a resumption of the progress that had been

made toward creating a global market in goods, labor, and capital in the period

from 1850 to 1914. Ranald Michie, the preeminent historian of the London Stock

Exchange in that bygone halcyon era, presents the story of how the London Stock

Exchange rose to preeminence in that earlier international capital market, but

then suffered through the disruptions of the international economy created by

two successive world wars and the financial crises that followed them, and is

now still struggling to retain a reputable place in the new global capital

markets that have emerged over the past thirty years. Written on the basis of

an intensive examination of the records of the London Stock Exchange, his work

will now be the standard reference on the London Stock Exchange, replacing old

classics such as E. V. Morgan and W. A. Thomas, The Stock Exchange: Its

History and Functions, (London, 1961), and even Michie’s earlier work,

The London and New York Stock Exchanges 1850-1914, (London, 1987). The

timing of its appearance is especially fortuitous as the current members of the

London Stock Exchange decide how to vote in September 2000 about the proposed

merger with the German stock exchange. Will the smaller members lose their

livelihood from the competition of the more efficient German firms? Or will the

merger preserve their incomes from the competition of electronic market makers

not constrained by the rules of a formal exchange? Or will the largest firms be

willing to buy them out on favorable terms in any event?

These are the questions today, but they have been faced in much the same terms

any number of times over the past two hundred years, as Michie documents. The

answers, though, have varied depending on both the nature of the external

competition and the nature of the internal composition of the exchange. Michie

argues that his kind of study, focusing on the decisions taken over time by the

members of the London Stock Exchange, can reveal much about the role of the

financial system in shaping the course of the real economy. It is not the

securities market in Britain as such, then, that concerns him, but rather the

specific role of the self-governing organization called the London Stock

Exchange in the securities market. This is certainly a worthy endeavor and

modern finance scholars are increasingly concerned about the implications of

what they call “market microstructure” in determining the efficiency of price

discovery processes as well as overall efficiency in financial intermediation.

For them, Michie describes and appraises the creation, operation and evolution

of the microstructure of what is still one of the world’s leading stock

exchanges and was the undisputed leader during the gold standard era. He does

not, however, deal with these arcane issues of market efficiency, to the

disappointment of some readers, but no doubt the relief of most. (The awkward

term “microstructure” never appears in the 642 pages of text.) But neither does

he entertain with stories of rascal behavior by the more opportunistic

participants of the “House,” to the disappointment of most readers and no doubt

his publisher hoping for more robust sales. Rather, he concludes each chapter

with a table showing the number and capitalization of the securities listed on

the London Stock Exchange for a benchmark date. These together show the

changing scale and scope of the exchange’s market over time. This is a solid

work of original historical research that gives the reader many interesting

insights and raises important questions for practitioners and policymakers as


Michie begins his story, “From Market to Exchange, 1693-1801,” with an overview

of the rise of an informal, unorganized, secondary market in government debt.

This begins, in his view, in 1693 with the establishment of permanent debt that

could be transferred. As the amount of debt increased with each successive war,

so did the number of investors, encouraged by the government’s ability to

continue servicing at least the regular interest payments promised on the debt

issues. Gradually, specialists arose, both brokers and jobbers, both very

important to the operation of an efficient secondary market for any set of

products. Brokers made their money from commissions they charged to their

principals, who desired to buy or sell an amount of a particular security

within a specified price range. Jobbers provided the brokers the counterparties

to their principals, offering to sell to their buyer or to buy from their

seller the particular security. They made their money on the difference between

the prices they bid or asked, and saved the broker the time and expense of

finding a specific counter party to his original client. Both made more money,

the greater the volume of transactions. Brokers made a commission charged to

their principals; jobbers made a “turn” on the bid-ask spread always intending

to buy low and sell high. By the end of the eighteenth century, the number of

investors was large and a number of specialized brokers and jobbers seemed to

be making a living from their respective trading activities. Nevertheless,

asserts Michie, this was just a market, not an organized exchange that could

affect by its own rules and enforcement decisions the way the security market

would develop in the future. In 1801, however, the informal London stock market

ceased to be shaped strictly by outside forces and henceforth could determine

in part its own destiny through the decisions taken by its governing bodies.

These were the Committee for General Purposes for the Members and the Trustees

& Managers for the Proprietors.

How they operated vis-?-vis each other to solidify the tradition and prestige

of the “House” is detailed in “From Money to Capital, 1801-1851.” Readers

familiar with Michie’s earlier comparison of the London and New York stock

exchanges, the two classic examples of financial capital marketplaces, will

find a familiar theme in his emphasis in this book upon the importance of the

governance structure of the London Stock Exchange as it coped with the

successive changes in monetary regimes, government controls and policies, new

communications technologies, and international and domestic competition.

Responding to the pressures of war finance in 1801 at the outset of the

Napoleonic Wars with France, one group of traders became the Proprietors of the

building that housed the market place for the Members engaged in actual

trading. The Proprietors, as owners of the market place, but not of the

products of the market place, were strictly interested in maintaining a large

membership paying annual subscriptions for the use of the facility while

keeping operating costs as low as possible. The Members, as users of the market

place, were concerned strictly with generating a large volume of trading while

keeping their own costs of business as low as possible. Faced with outside

competition from time to time, the Members would try to restrict access, while

the Proprietors would try to co-opt it into the House. Members, however, had

complete control over who could become a Member, although Proprietors set the

annual entrance fee that individuals had to pay to take up their membership and

determined the hours of operation and physical amenities provided. Once in

place, this method of operation proved self-sustaining and it endured through

all the travails and opportunities that ensued over the next two centuries.

In the first half century, the governance structure was challenged by two

shocks, the brief but intense interest in foreign government debt and foreign

mining shares in the early 1820s and then the longer and even more intense

investor enthusiasm for railroad securities starting in the late 1830s. In both

cases, the users of the exchange wanted to keep out competition by traders

specializing in the new securities but the owners of the exchange accommodated

them as soon as possible to prevent an alternative exchange from arising in

London. The resulting expansion of business benefited all members and

solidified their operating rules and governance procedures.

In the rest of the nineteenth century, which Michie labels “From Domestic to

International, 1850-1914,” the British success with financing domestic

railroads led to providing finance for foreign railroads and then for large

commercial and industrial firms both at home and overseas. The continued

expansion of the number and variety of securities listed on the exchange led to

enlarged memberships and increased pressure on the physical facilities of the

exchange. To finance a new building in the 1870s, the Proprietors increased

fees on the Members, who responded by demanding more voice in management. The

conflicting interests were resolved through expanding the capital stock of the

Stock Exchange by requiring all future members to become shareholders as well

as subscribers. The number of shareholders grew, as a consequence, from only

268 in 1876 to 2,366 in 1914 so that there gradually occurred an overlap

between Proprietors and Members. In his earlier work, Michie has argued that

the increasing voice of broker members in the governance of the Stock Exchange

was gradually undermining its flexibility in responding to competitive

challenges and its responsiveness to technological advances in communications.

Now, his appraisal is that the exchange was remarkably flexible and responsive,

especially, one infers, by contrast with its continued dithering over the

period 1945 to 1986, which came dangerously close to eliminating it entirely as

an organization.

What accounts for this earlier success? Internally, one factor was that dual

control by Proprietors and Members continued to be effective in offsetting

tendencies towards restricting access to the exchange; another was the

continued importance numerically of jobbers within the membership of the

exchange. Externally, the most important factor was the central role played by

the Stock Exchange in the money market of London. The ever-expanding joint

stock banks in London found that their loanable funds could be employed

profitably for short periods of time by lending to so-called money brokers who

were members of the Stock Exchange. They, in turn, could lend on security of

shares and stocks held by jobbers to allow them to settle differences at the

fortnightly settlements or to continue their positions to the next account.

Specialization in function within the Stock Exchange thus occurred that allowed

further specialization in function among the financial intermediaries of

Lombard Street. These nested specializations increased efficiency in the use of

funds by all concerned. They also allowed, however, increased efficiency within

the growing number of provincial stock exchanges, who could tap into the London

money market easily through the branches of the joint-stock banks.

Whatever the dynamics of the emerging structure of finance and industry would

have created for the future of the British economy, the impact of World War I

changed everything, and mostly for the worse in Michie’s opinion. First of all,

it eliminated the foreign business of the Stock Exchange bringing that under

the control of the Treasury, now concerned only with raising money for war

finance. Second, it eliminated the money market role of the Stock Exchange by

eliminating dealing in options and even for account. Finally, it created a

comfortable source of easy commissions by the huge increase in government debt

traded on the Stock Exchange. Wartime restrictions on membership created by

military service for younger members and expulsion of foreign, especially

German, members were formalized by rule changes when peace returned. Minimum

commissions were rigidly enforced. In short, the war changed permanently all

the external conditions that had created prosperity for the members of the

Stock Exchange before the war. But it also strengthened the rigidity of

internal rules that protected the incomes of the surviving members.

Michie then treats the interwar period in two separate chapters, “Challenges

and Opportunities, 1919-1939,” and “The Changing Market Place Between the

Wars.” The first chapter details how “the rules of the Stock Exchange, designed

to create an orderly market, were increasingly used by the membership to limit

the competitive environment within which they operated. This was true both in

terms of outside competition, with restrictions on admissions, and internally,

with minimum commissions and other controls. The end result was a lessening of

those forces for change that had forced the membership in the past to respond

to challenges and to seize opportunities” (p. 234). This is exactly the

conclusion one expects, given Michie’s earlier study. The second chapter argues

that, nevertheless, the ossification of the Stock Exchange was not the key

problem for the finance of British industry during the interwar period. Rather,

the increased rate of taxation needed to service the huge increase in

government debt, the decline of profitability of older industries, and London’s

diminished international role all limited the potential supply of finance,

irrespective of the reduced efficiency of the Stock Market in providing

financial intermediation. While researching the current book, Michie has become

more sympathetic to the efforts of the Stock Exchange as an organization and

more critical of the external forces that limited its potential service to the

British economy.

In “New Beginnings: The Second World War, 1939-1945,” the changes that the

exigencies of war finance had inflicted upon an unsuspecting and unprepared

Stock Exchange in 1914 were now adopted quickly as a matter of course. The

Stock Exchange willingly became an administrative arm of the government,

helping the Treasury to market its burgeoning debt issues and receiving in turn

the protection of the government against competitive forces in the government

debt market. Dual control was finally ended informally, as the Committee for

General Purposes for the users and the Trustees and Managers Committee for the

owners were combined into a Council, dominated by the members, or users, of the

Stock Exchange for the duration of the war. This streamlined governance

structure made the postwar Stock Exchange an effective arm of the government,

but ossified the responsiveness of the organization to the competition of

provincial exchanges and of the joint stock banks in dealing on the securities

markets in Britain. It did, however, enable the members to buy out the

proprietors and formally end dual control in 1948. Thereafter, the business of

the Stock Exchange was not to make a profit for the owners, but to render

services to the existing members. On the expense side, however, it was

committed to pay out ?160,000 annually to buy out the previous Proprietors and

committed to enlarging its salaried staff to carry out the regulatory functions

it believed the government expected of it. On the revenue side, members were

not willing to vote increased subscriptions fees, much less stock assessments,

on themselves, especially as the incomes of many firms fell after the war.

“Drifting towards Oblivion, 1950-1959,” “Failing to Adjust, 1960-1969,” and

“Prelude to Change, 1970-1979,” are the chapter titles that follow and they

convey well the encompassing malaise that overcame the Stock Exchange and most

of its members, steadily declining in number and consolidating into fewer and

fewer firms in each succeeding decade. During the 1950s, however, the London

Stock Exchange found a new role despite its hidebound governance and

administrative structure. This was serving as a market place for the rising

volume of domestic corporate shares. These were not, Michie argues, a new

source of finance, but a substitute for business debt with fixed interest,

which was increasingly unattractive to British investors in the persistently

inflationary climate of the 1950s. These didn’t match in total volume the size

of government debt, but in terms of trading commissions earned by member firms

they were just as important as those earned on placing and trading issues of

government debt. Moreover, government debt trading became increasingly

concentrated among fewer firms while corporate equities could provide niche

markets for a variety of the member firms. In the 1960s, this trend established

in the 1950s continued to the benefit of the Stock Exchange and its members.

But it also elicited increasing interest from foreign investors, whose demands

were quickly met by foreign firms, both banks and investment houses, located in

London, rather than by the Stock Exchange. Further, provincial exchanges and

non-member stockbroking firms found it easy to enter this growing market,

especially as the Stock Exchange became increasingly restrictive in its listing

requirements for corporate equities. As a quasi-regulatory arm of government,

the London Stock Exchange felt it was important to protect outside investors

from the risks of smaller firms in new industries, but this was precisely where

the largest potential profits could be made. The circumstances of the 1970s at

first confirmed the wisdom of this strategy to the leadership of the Stock

Exchange when the equities market collapsed in 1974. This led to a formal

merger with the provincial exchanges, enlarging the membership of what was now

called the International Stock Exchange within the same rigid set of rules as

before. The country jobbers were forced to become single-capacity brokers, so

they helped strengthen the support within the membership for enforcing minimum

commissions. Moreover, the Stock Exchange was now a much more effective

regulator of the British securities marketplace. But the cost of this

consolidation was that the Stock Exchange was further constrained from

responding to challenges by foreign exchanges and firms, and from initiating or

even imitating financial innovations taking place within non-member firms and

the major financial intermediaries in the City of London.

The breakthrough that eventually led to the “Big Bang” (chapter 12) in 1986,

the once for all elimination of minimum commissions and restrictions on the

size and functions of member firms, Michie argues, was the elimination by the

Thatcher government of exchange controls in 1979. Now the customers of the

brokerage houses, increasingly the banks, insurance companies, and investment

houses, could readily invest abroad with foreign exchanges and stockbroking

firms. Foreign banks and brokerage houses in London could now bypass the high

costs of the Stock Exchange without incurring the penalties imposed by exchange

controls. The response of the Stock Exchange to this challenge was delayed

until 1986, however, not because of the rigidity of the governance structure,

but because of the Thatcher government’s attack on the privileges of the Stock

Exchange brought before the Restrictive Practices Court. While this action was

on the docket, the Stock Exchange officers felt compelled to defend the entire

corpus of Rules and Regulations that had accreted over the decades, according

to Michie. Not until the case was dismissed by the government in 1983, did the

officers feel free to move forward to modernize the rules of the Stock


In the penultimate chapter, “Black Hole,” Michie begins by stating that “On 3

March 2001 the London Stock Exchange, as a formally organized securities

market, will have existed for two centuries.” That, we now know, remains to be

seen! Michie documents the difficulties faced by the venerable institution for

survival, but seems to think they stem mostly from continued hassling of the

securities market in general by government regulators. Given the City’s success

previously in attracting the business of foreign international banks, mainly to

deal in the Euro-dollar and Euro-bond market that developed outside the Stock

Exchange, the Big Bang’s removal of restrictions on membership allowed the

entry of the most innovative firms and practices from around the world. At his

most optimistic, Michie opines, “In fact, what emerged from Big Bang was akin

to the dual control which had worked so well in the past, with responsibility

now shared between the Stock Exchange, representing its members, and the

regulatory authorities, reflecting the needs of the wider financial community”

(p. 634). General readers could more easily share this optimism if they had

confidence that the regulatory authorities would reflect the needs of the

financial community rather than the needs of their political masters to be

re-elected within five years. Indeed, Michie’s final lesson that he draws from

his historical account is “that self-regulation without monopoly power has

produced the most satisfactory solution in the past. Otherwise governments

operate to their own agendas, distorting the market and destroying innovation

in the process, while self-regulating monopolies abuse their power for their

own self-interest” (p. 642). The challenge is clear; how it will be met is not!

Larry Neal is Professor of Economics at the University of Illinois at

Urbana-Champaign and Director of the European Union Center at Illinois. He is

past president of the Economic History Association and the Business History

Conference. From 1981 through 1998, he was editor of Explorations in

Economic History. He is author of The Rise of Financial Capitalism:

International Capital Markets in the Age of Reason, Cambridge University

Press, 1990 and The Economics of the European Union and the Economies of

Europe, Oxford University Press, 1998 as well as numerous articles in

American and European economic history.