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Jonathan’s wouldn’t remain as hospitable to Hooke and his philosophical friends for long. As coffee culture evolved in London, its sites grew more specialized. Theater people had their haunts, scribblers too, and so did a group engaged in a business that had burst into prominence suddenly after William and Mary had gained their throne, the men who traded in money.
AT BOTTOM, THE joint-stock structure was simple: a group of investors provided capital to pay for some action—in the early days, usually a trading venture. In return they received shares in proportion to the amount each invested. This was more than a simple pooling of resources; partnerships and more temporary alliances existed long before the joint-stock company emerged. Unlike such arrangements, a joint-stock approach shifted what it meant to own a business. Instead of indicating part ownership of discrete chunks of actual stuff—a ship, a stand of timber, a machine—shares in a joint-stock
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the joint-stock structure made it possible to pool capital from a wider base and to operate indefinitely—a more flexible and more scalable approach to doing business.
The joint-stock concept in use by the late seventeenth century thus echoes the essential insight of the natural philosophers: bringing an ever-growing range of different phenomena—buying and selling instead of planets—into a form that could be analyzed, compared, quantified, and, most important, readily bought and sold.
The first joint-stock company in England launched in 1553: the Muscovy Company (originally known, marvelously, as the “Mystery and Company of Merchant Adventurers for the Discovery of Regions, Dominions, Islands, and Places unknown”). Its approximately 250 shareholders invested in expeditions in search of the rumored Northeast Passage to China and launched a series of trading ventures with Russia.
The East India Company itself illustrates the difficult process of change in commercial practices as people experimented with the joint-stock form. For example: for decades, it did not create a permanent fund of capital, the kind of financial structure that enables continuous operations. Instead, it used short-term agreements to support its ventures as late as the 1650s.
Taken together, while these early joint-stock ventures carried Englishmen around the globe and hauled the world back to London (sacks of coffee included), there weren’t very many of them, and those few were owned by a very small circle of rich people.
Shares could be traded on Exchange Alley, but for the most part they weren’t. Between 1682 and 1684, for example, there were just sixty-seven sales of Royal African Company stock, and shares in the giant East India Company changed hands just 537 times.
The year before James and Mary returned to home waters, fewer than twenty English joint-stock companies existed. By the mid-1690s, there were about one hundred. Some of those new enterprises were direct copycats, get-rich-quick schemes born more of desire than of any rational calculation. But over the next decade London saw the start of a boom in offerings of more plausible concerns.
Most of these were small operations, and many failed to survive into the new century. But the sheer range of the opportunities they offered to Englishmen and -women who might support them combined with one other crucial development of the 1690s. The new national debt was itself a potential investment. A share in the Million Act or a ticket for the Million Adventure could be sold to third parties. One could trade in Bank of England stock too. All those who had supplied the Bank’s initial £1.2 million in capital received shares that carried with them the right to whatever profits the Bank might
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The concentration of exotic figures attracted the attention of seventeenth-century travel writer Ned Ward, who described a cross between a kind of “nations of the world” exhibit and a simulacrum of hell, filled with demons.
There was one group missing from Ward’s lineup. His rant singled out merchants, but by the time he took his stroll at the end of the ’90s, one claque of traders was gone: anyone dealing in joint-stock shares. Stockbrokers were, it seems, too loud, too bumptious, the wrong sort, and just generally ill-behaved, even by the standards of the shouting scrum of all the other buyers and sellers in the building.
Fake news was a daily fact of life in Exchange Alley, as tipsters for another novel phenomenon, the newspapers, prowled the coffeehouses in search of choice nuggets. Information—or what could be passed as such—had a recognized price, “a shilling, or a pint of wine,” paid to “some little Clerk, or a conference with a Door-keeper.”
Murphy uncovered the case of Estcourt’s Lead Mine Company, floated in 1693 at ten pounds a share by a group of stockjobbers and wealthy Londoners. Over the next two years the company’s stock price behaved suspiciously—with big jumps associated with large sales by insiders to naïve buyers along the Alley.
The 1693 venture with Estcourt’s Lead Mine Company showed how swiftly he’d mastered the stock market’s habits, exactly the behavior Defoe condemned. Blunt and other insiders managed to get in early on Estcourt stock, curried interest in the scheme, and cashed out as knowledge of the company’s potentially declining prospects gave them the edge over whoever was on the opposite side of the transaction—or, as Murphy puts it in the dispassionate language available to the long view, “The only reasonable conclusion, is that the price of Estcourt’s Lead Mine stock was manipulated by its managers to
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Similarly, for all the real evidence that Exchange Alley could be a very dangerous place for any but the most sophisticated—or exceptionally canny—there is this fact: it worked.
For all the new issues promoters were trying to sell, most of the money in the market went to the largest propositions: the East India Company, the Bank of England, slices of the Million Act loan, Million Adventure tickets, and a handful of others. These were all either large, well-understood trading companies or financial shares backed by the government.
England and Britain’s financial revolution turned on the themes most closely associated with the parallel scientific transformation: the application of number to experience; the discovery of the mathematics of risk, both in the moment and over time; and the incorporation of both those leaps into money expressed as credit, a form of wealth whose value evolves over days and years.
A jobber looking to buy East India stock in the coffee room at the Jerusalem had no way to know what a broker had just charged for the same security a few hundred yards away at Jonathan’s.
If no one—brokers and dealers included—could be sure how much to pay for anything, the Alley’s men could trade in shares, but they couldn’t perform the essential function of a market: enabling buyers and sellers to meet and strike deals with confidence that no one was pulling a fast one, cheating on what the rest of the market thought the price should be.
But whatever the particulars, Exchange Alley had to give its clientele a reasonable expectation that the amount paid for a slice of the national debt would be the same at Jonathan’s as it was at the Jerusalem. Otherwise, if the men and women crowding the Alley couldn’t feel at least fairly confident in their prices, the state’s ability to borrow by selling debt to be traded on such a fractured market would suffer.
The dearth lay in information, a clear, simple, and reliable record of the aggregate conclusions of the market at any given moment. To meet that need, Castaing came up with the obvious-in-hindsight response in March 1697: a simple list of prices, updated daily, under the title of The Course of the Exchange and Other Things.
He enlisted a platoon of clerks to walk the Alley and nearby streets in midafternoon, just as the day’s affairs were winding down. They would canvass jobbers and dealers to find out the last prices received for the various investments covered by The Course. Final, printed sheets came out twice a week on Tuesday and Friday evening.
a market is more than a place; it is information, accessible to those who take part in it. When that information is poorly communicated—or doesn’t exist—bricks and mortar can do little more than keep the rain off a failing bourse.
Of course, such a paper couldn’t solve every problem for a nascent financial market. Insider trading—especially in the smaller joint-stock companies that never made it onto Castaing’s list—remained a constant danger. Rumors could swamp the kind of hard data Castaing tried to gather. Outright frauds certainly occurred. But The Course of the Exchange gave the market its memory and, effectively, reported on the insight of the hundreds of individual traders making bets on what would happen next, tomorrow and for years to come.
By the turn of the eighteenth century it was all in place: the power of mathematics and the habits of observation most closely associated with the scientific revolution had created new ways for late-seventeenth-century Englishmen and -women to think about the future. The near-simultaneous crisis for England’s hard currency and the emergence of forms of credit subject to calculation and mathematical analysis created new forms of money. In the nascent stock market both such credit novelties and the newly constructed private enterprises could be priced and traded—thus cementing the connection
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The floating debt was a common tool of official finance, sums borrowed for a few months or so. Such borrowing was useful to allow the Treasury to navigate problems like needing to pay bills—military pay, suppliers, and the like—at different intervals than the timing of its income, tax payments, for example.
The daily price quoted on Exchange Alley for the Treasury’s short-term paper sent a clear signal to both officials and everyone else about how much confidence the monied public had in the government at any given moment.
This ability to take one’s cash out of the world of finance was an escape hatch that made it much easier for the government to borrow. The new loans thus depended on the ongoing ability of London’s new stock market to buy and sell all the debt the government chose to create.
FROM THE TRIUMPH of the Glorious Revolution in 1688 through 1697, England spent almost £50 million on its war with France. The Treasury borrowed almost exactly one-third, just over £16 million in all.
That sly gibe aimed at the Alley’s men was perhaps inevitable but slightly off his main point: promises made by individuals or businesses—or the Treasury—that relied on events that would unfold years down the road would seem perfectly safe up to the moment they were not.
Ultimately, he concluded, this new invention of credit was a broken reed, “not to be depended on.” England could borrow, to be sure, but should it, beyond a very carefully drawn limit? Pollexfen, as sober and clever a businessman as could be found in London, was clear: it should not.
Newton agreed with Pollexfen that credit, by allowing a borrower to spend more money than he, she, or it possessed, could produce a false sense of wealth and thus feed an urge to fritter away paper wealth on fine living. But Newton performed an exhaustive study of the history of England’s currency—how much metal money the Mint had coined over the preceding century and what the current state was of the worldwide trade in precious metal—noting that gold was much cheaper in China and Japan than in London. He concluded that government borrowing, with its creation of forms of credit that did some
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Newton was not a deep financial theorist, but he leapt ahead of many of his contemporaries in this argument, that the official obligations, divided up into easily traded shares, could be an instrument of policy. The Treasury’s borrowing was thus much more than just a way to deal with a moment’s shortfall. It was more useful than that. Credit touches the future, as it makes a prediction about the economic life of the nation in years to come: the interest on a loan is a claim on future revenue, on the taxes a government can extract from those it rules.
Newton was no proto-Keynesian. He wasn’t suggesting that the Treasury should choose to create a deficit—deliberately pay out more than it took in to help out in hard times—nor was he suggesting that the government should manipulate interest rates to stimulate economic activity. There was no real way to think such thoughts at that moment, in fact, as the infrastructure of modern financial policy did not yet exist.
The primary market for a security is the one in which the creator of that instrument sells its bonds or other types of financial paper to their initial buyers. In these early days that was usually by subscription—a company or the Treasury would offer shares or debt, and those who wanted to invest would sign up for the amount they wanted to buy.
Every drop in the price of a piece of debt raises the effective interest on the loan: if the original rate was 5 percent, then £100 of face value still earns £5 even if that instrument sells for just £80. That’s a 6.25 percent return on the £80 the lender actually had to pay for her investment.
As the war dragged on and on and on, the cost of this massive military effort rose steadily until by 1710 the cost of the war had climbed toward 10 percent of England’s income—that’s the product of the whole nation’s working life, not just the government’s revenue.
The government borrowed £8 million from 1704 to 1708. More obligations followed as the Treasury negotiated large loans from the big joint-stock monopolies, the East India Company and the Bank of England. Then the Treasury turned back to the public at large with even greater hunger: £2.4 million offered in 1710, followed by an astonishing £7.1 million over the next two years. By 1713, as the books closed on the war, Britain’s long-term national debt, zero at the beginning of 1693, roughly £7 million by 1697, stood at over £40 million.
The huge costs of the war strained the capacity of London’s market in money to come up with all the cash the government demanded. Clear signs of trouble came in 1711, when the Treasury sought buyers for the first of four new lottery loans. It took a heroic offer to draw the punters in: 8 percent interest to be paid for more than three decades.
Supporters of the government and the war could argue that peace would restore fiscal prudence. But that was hardly reassuring, given that England and then Britain had fought France for all but five years since William had come to power back in 1689.
England. It is a mistake to see those two labels, Whig and Tory, as marking broadly consistent political commitments. The two groupings had clearly different views of kingship and governance in the years leading up to and just after the end of the Stuart dynasty. But twenty years on, such associations were less about coherent beliefs and more about networks and the interests and patronage power of one’s friends.
On November 5, 1709, Henry Sacheverell, a clergyman with a loathing for any lapse in orthodoxy, climbed the curving stair leading to the pulpit in St. Paul’s Cathedral. Brimstone showered down, a vicious condemnation of lapses within the Church of England. The sermon was later printed under the title The Perils of False Brethren in Church and State and was immediately understood as an attack on the doctrinally squishy Whigs. Following a second, even more incendiary sermon three weeks later, Godolphin’s Whigs brought him to trial in the House of Commons, convicted him, ordered his sermons burnt
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The plan was to transfer government obligations to a new, private company. Those who had lent their money to the Treasury would now receive shares in that joint-stock operation. The company in turn could use its new capital—all that government debt, with its market value and guaranteed stream of interest payments, now the property of the fledgling concern—to fund whatever business it had been set up to do.
The Bank of England had tried something similar in 1697, offering its own shares to holders of certain loans on which it appeared the government might stop paying the interest due. For those who owned the suspect paper, the bet was that the Bank would be much better placed than any individual to force the crown’s officials to pay up, if not on time, then eventually. This was a popular view—investors swapped about £800,000 in obligations for the Bank’s stock—and it turned out to be correct.
The trio’s first move was a kind of financial grave robbing: they exhumed the corpse of a near-dead enterprise, the Company for Making Hollow Sword Blades in the North of England. Better known as the Sword Blade Company, it had been founded in 1691 with the stated intention to produce “hollow” or grooved sword blades in the French style—deemed superior to the traditional English flat-bladed rapier. The sword business went well for a few years but collapsed by the end of the decade, leaving behind nothing but a charter as a joint-stock company. These financial buccaneers recognized that such a
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Blunt was hardly the first person, nor would this grasping scrivener be the last, to love his family while bludgeoning his foes. The one constant recollection, though, reported by both his enemies and his allies, has nothing to do with questions of sin or grace. Whatever else he was, it was clear that John Blunt was very clever indeed—and thoroughly determined to use his intelligence to get as rich as it was possible to imagine.
The first bargain struck under its umbrella was a dodgy land deal—an attempted grab of Irish estates owned by supporters of the deposed Stuarts, which had been confiscated after William and Mary took the throne. The Sword Blade proprietors offered £200,000 for property in Ireland that returned rents of £20,000 a year—a bid for a very healthy 10 percent return on their money. The only problem? They didn’t have the cash. Their solution lay with that surviving charter as a joint-stock business. With that, the Sword Blade Company could create new shares in the company. In the ordinary course of
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By the terms of the proposed deal, anyone with army paper to sell could exchange it for Sword Blade stock issued at £100 per share—an instant gain of that same sum, £15, as long as Sword Blade shares held their value on Exchange Alley. Naturally, the Sword Blade Company found plenty of people willing to make that trade. Even less surprising, the Sword Blade principals worked their insider knowledge for all it was worth, buying deeply discounted army paper in Exchange Alley before they announced the swap. By one estimate, Blunt and his associates made at least £25,000, about £4 million now, by
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The government rid itself of a substantial chunk of debt; the Sword Blade Company gained command of some Irish land that generated an above-market return; and holders of risky government paper gained both a share of that revenue and a chance at further profit if Sword Blade shares rose over time—a win-win-win!
