Long before New York became a financial capital of North America, let alone the world, London already had the institutions befitting a city of finance and commerce. The Royal Exchange had been founded by merchant and advisor to the monarch, Sir Thomas Gresham in 1571. Lloyd’s of London would be founded in a coffeehouse a century later, a few years before the Bank of England was formed.
Already in the early 1700s, on the eve of the infamous South Sea Bubble, London also had an active stock market; but it was one that operated without a grand venue to house trading under one roof. Stockjobbers, as they were called, traded shares in several joint-stock companies in a handful of London alleyways and coffeehouses. These companies included such well-known shipping and trade firms as the South Sea Company itself and the East India Company but also banks and insurance companies.
Exchange Alley
All this trading took place outside the Royal Exchange, in which commodities were traded. Stockjobbers, who acted as dealers for stocks, were judged to be too rude and rowdy for the Royal Exchange. But they didn’t stray far; for over a century, the alleyways just outside the Royal Exchange acted as London’s first stock exchange.
Exchange Alley, as the area was called, used to house manufacturers and sellers of equipment used by the shipping industry. By the late 17th century, it was home to a number of coffeehouses where stock prices were posted and traders bought and sold their shares. Two of the more famous were Jonathan’s Coffee-House and Garraway’s Coffee-House. In a Puritanical period, coffeehouses proliferated as an alternative to alehouses and taverns. The coffeehouses of Exchange Alley were where London’s stockbrokers and dealers did business.
But why here in particular? As the map below shows, Exchange Alley connected Cornhill and Lombard Street. It was close to the Bank of England on Threadneedle Street and the Royal Exchange between Threadneedle and Cornhill. These three major roadways radiated out, as they still do, from just outside the Lord Mayor’s residence where the London Underground’s Bank Station sits today.
But perhaps the most important local establishment was the post office on Lombard Street. Yes, you read that correctly. So important was the General Post Office that some of the coffeehouses on Exchange Alley even offered a private courier service to their share-trading patrons. The reason for this was how essential the post office was to the flow of information.
When news from outside London came into the city, it often came through the General Post Office first. Of course, early access to information is priceless to traders. In this way, the post office became, like the Bank of England and the Royal Exchange, another crucial institution in London’s financial heart. The rise of London as a financial center in this period may even owe a small amount of credit to the decision by King Charles I to allow the public to use the Royal Mail, which before 1635 was used as the monarch’s private postal service.
Given the proximity to the principal post office in central London, the use of Exchange Alley as an unofficial stock exchange seems logical. Suppose you were a trader in 1720 and you were looking to profit, or at least avoid loss, on news of a shipwreck affecting an East India Company vessel. The news would first come through the post office; if you were trading at the Royal Exchange, the news would take longer to get to you than if you were standing on Exchange Alley. The location was perfect.
Stockjobbers
Earlier, reference was made to the stockjobbers. Those not familiar with the way shares were traded in London up until the late 20th century may not have known who these people were. If you thought they were simply stockbrokers, you would be mistaken. In reality, they were dealers who held securities in inventory and supplied them to brokers. They also acted as market makers, providing liquidity by taking up the other side of trades for those looking to transact.
In fact, up until 1986, the job of the stockbroker and the stockjobber (as a market-maker and a dealer) had always been kept separate in Britain. The idea was that a broker should not be able to sell a stock to a client in which they themselves had a position. To do so would create a conflict of interest, or so it was felt. As a result, stockbrokers sold to clients by buying from stockjobbers who held the inventory.
In the early 1700s, on the eve of the famous South Sea Bubble, stockjobbers were increasingly making large sums of money and achieving nearly unreachable social status for commoners. An author recounts the story of one stockjobber, named Quare, who started working as a watchmaker. But he also had a knack for speculation and eventually became so rich from trading that he became a kind of celebrity who went on to have “as his guests at his daughter’s wedding-feast the famous Duchess of Marlborough and the Princess of Wales, who attended with 300 quality visitors.”
South Sea Company and Beyond
This was of course the era of the South Sea Company. Like the stockjobbers, it deserves its own post, but it should be mentioned briefly here because, like other financial dealings in 18th century London, Exchange Alley was its setting. The South Sea Company was established in 1711 and was given a monopoly on trade with Spain’s American colonies by the British government. People could invest in it by swapping their government bonds for shares in the company. The company would take their bond and the investors would be made shareholders.
This seemed to benefit all participants in the scheme. Investors obtained assets with more income-generating potential than their old bonds. The government saw its debt consolidated, reducing administrative costs by paying interest to one company instead of many investors; they also made deals with the company that would reduce its interest burden. Also, the company got out of this a source of income, interest on the bonds it exchanged for shares, with which to launch its trade.
The story did not end lucratively for those who invested. Periodic wars with Spain which saw company assets in their colonies seized, and very limited trade even when it did occur, meant the company never made much money. It was said that the South Sea Company spent more time issuing stock than conducting any trade. Nonetheless, the stock price kept surging, especially in 1720. Going into that year, the stock was trading at £128; it then hit a mid-year peak of £1,000. Finally, it crashed, and returned to £100 by year’s end.
The following caricature of the period, by William Hogarth, shows crazed speculators crowding around a carousel, waiting to ride. The scene is set in central London; St. Paul’s Cathedral is in the distance and the pedestal on the right is for the Monument to the Great Fire of London, located just a short walk south of Exchange Alley. The scene shows even the well-dressed of London in a frenzy waiting to jump on the ride. This was a critic’s view of Exchange Alley in the early 1700s and of financial excess ever since.
Lesson
As long as shares have been traded, there have been stockjobbers, or their modern equivalents, and there have been stock exchanges, however informal they were. As primitive as they may have seemed, they were not too different from those of today. They were strategically located, with access to information of great importance, and they were established close to related institutions, from banks to other exchanges. There were bubbles and crashes, and coffeehouses, like Jonathan’s and Garraway’s, close by. The place could describe London today or even New York; the concept has survived time and transplanted itself throughout the world.
Further Reading
1) Evans, Izzy. The Origins of the London Stock Exchange. Owlcation, 16 Apr. 2014.
2) Goetzmann, William. “Reinterpreting the First Great Stock Market Crash: South Sea, Mississippi & Windhandel Bubbles.” 2013 Yale Presidential Inauguration Symposium.
3) Hamey , Baldwin. “Garraway’s Coffee House.” London Details, 27 Nov. 2012.
4) Paul, Helen J. “The ‘South Sea Bubble’: London’s Financial Crash of 1720.” We’re Never Far from Where We Were, Brewminate, 30 Jan. 2018.
5) Thornbury, Walter. “The Stock Exchange.” Old and New London: Volume 1. London: Cassell, Petter & Galpin, 1878. 473-494. British History Online. Web.
