ORIGINS OF MODERN FINANCE: New evidence on the financialisation of the early Victorian economy and the London Stock Exchange

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30 Mar 2016

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Previously unexplored collections at the Bank of England are providing novel perspectives on the size, functioning and role of the London Stock Exchange (LSE) in early Victorian times. Among the findings of research by Andrew Odlyzko, to be presented at the Economic History Society’s 2016 annual conference in Cambridge: 

  • Share price lists from that time provide a very imperfect record of LSE business, for many securities covering not much more than 10% of the transactions.

  • Turnover was very low – under 10% per year for Bank of England shares, for example)

  • Trading was dominated by a small number of large players.

  • The LSE provided surprisingly efficient service to retail customers, given these constraints.

  • The LSE was an important, and so far almost totally ignored, part of the ‘shadow banking system’ of the time.

The study helps to build a fuller picture of the development of modern corporate capitalism, which should provide better perspectives on current financial decision-making. The early Victorian society and markets were very different from ours, but they did share many features familiar to us, such as crushing national debts, financial crashes, liquidity traps, slow growth and glaring inequality.

Yet that is exactly when the flowering of the Industrial Revolution took place, leading to the start of rapid economic growth. Comparing the policy decisions and the policy-making processes of different periods illustrates the range of choices that are available, and the extent to which reigning dogmas of a particular period constrain what is done.

As an example, in contrast to most modern observers, the early Victorians believed that markets were unstable, and that bubbles and crashes were inevitable. But they had to cope without resort to quantitative easing and other modern measures, and yet after the crash of 1866 enjoyed an extended period free of such catastrophes.

The early Victorian economy was just beginning the process of financialisation that is so prominent today. The finance industry was very small by modern standards, as this study demonstrates.

To a large extent, this was due to the low turnover of securities and preoccupation with extreme safety among investors of that era. This leads to speculations about the extent to which investor attitudes needed to be changed in order to provide equity capital for companies that were essential for the rapid economic growth of the post-1850 period.

The published literature on the LSE up till now has been remarkably lacking in information about some of the basic statistics of that institution, such as rates of turnover. This was due to data not being collected or deliberately concealed by the LSE. This work helps fill that gap.

The records that were used in the study (for trades in British government bonds) have been known to exist, but the volume of detailed data apparently discouraged researchers from attempting to investigate them quantitatively. But judicious sampling of the records for large securities and some complete digital transcriptions of a few small bonds turned out to be feasible, and show the promise of more detailed studies of those archives.

The study integrates the transaction data in the Bank of England Archives with price data and other information from published sources. More intensive research is likely to provide more insights into the origins of our modern capitalist system and the options available for governing its evolution.


Financialization of the early Victorian economy and the London Stock Exchange

Andrew Odlyzko

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