THE LONDON STOCK EXCHANGE: A newly discovered role in the shadow banking system of the 19th century

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29 Mar 2017

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In the nineteenth century, the London Stock Exchange (LSE) was a key element in the system for providing long-range financing for Britain and much of the rest of the world. A new study by Andrew Odlyzko, to be presented at the Economic History Society’s 2017 annual conference, reports his discovery that it was also a key element of the British shadow banking system. 

The LSE may even have been the key element in the system, since the rapid changes in interest rates and variations in rates for borrowing on different securities, as well as contemporary comments, suggest that this is where the various financial flows were equilibrated.

This finding has several implications. It helps explain the high efficiency of LSE's operation, as LSE members were able to handle large volumes of business with low capital by drawing on the resources of the shadow banking system. 

It also opens up new avenues for exploring what occurred in the British financial system during the severe crises that occurred several times in the nineteenth century.

The results also provide another interesting illustration of how little even the best experts understand the financial systems of their days. For example, The Economist in the late nineteenth century called for a small tax on financial transactions to limit speculation, a precursor to later calls by John Maynard Keynes, James Tobin and, most recently, by Bernie Sanders and Hillary Clinton in the 2016 US presidential campaign. 

But this late nineteenth century call was based on a misunderstanding that confused the shadow banking role of the LSE with speculation. 


Andrew Odlyzko
University of Minnesota
cell phone: +1 908-500-4875
website with this paper and others:

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