Absolutism and Mercantilism
The dominance of the state in times of absolutism and mercantilism had
a significant impact on the stock exchanges. A direct result are the new exchanges that were established by official authorities, such as the bourses in
Paris (1724), Berlin (1739), and Vienna (1771).64 Unlike the exchanges of the
first wave, which owed their existence to the initiative of the traders,
65 the
exchanges of the second group were motivated by the economic interests of
60 “Sollen die gesellschafften bleyben / so mus recht vnd redlickeyt vntergehen / Soll recht
vnd redlickeyt bleyben / so mussen die gesellschafften vnter gehen.” Id. at *30.
61 “Daß nach der bey ihnen üblichen Handelsart, ein jeder sein Glück für sich versuchen
könne, und unerhört seye, mit einem zusammengeschossenen Fonds, unter Aufsicht und
Leitung einer Handels-Direction, durch Compagnie-Vorsteher und Compagnie-Schiffe,
den Verkehr zu betreiben,”
3 GEORG SARTORIUS, GESCHICHTE DES HANSEATISCHEN
BUNDES 80 (1808) (Ger.).
62 JOHANN MARQUARD, TRACTATUS POLITICO-JURIDICUS DE IURE MERCATORUM ET COMMERCIORUM SINGULARI Lib. IV Cap. 7 n.57-59 528-30 (1662) (Ger.). One of us is working
on a more detailed account of Marquard’s treatise.
63 Placaet, Tegens het verkoopen ende transporteren der Actien inde Oost-Indische Compagnie of Feb. 27 1610, reprinted in 1 GROOT PLACAET-BOECK col. 553-56 (1658) (Neth.).
64 On the data, see supra note 46.
65 See supra Part II.A.1.
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the sovereign, who launched them as an instrument of his mercantilist economic policy. The indirect results of the omnipresent state influence come to
the fore at the exchanges themselves: almost all items that qualified for standardized trading, such as the shares of the semi-public overseas companies or
the heavily regulated import goods, depended on and related to the state.
1. International Financial Scandals
The many scandals that happened at the exchanges or in their surroundings formed both the historical development of this era and the modern perception of it. Some affairs arose independently of governmental influence;
others happened for no other reason but state interference with the markets.
As early as the end of the 17th century, the Sephardic Jew Iosseph de la
Vega (≈ 1650-1692) composed one of the most remarkable books ever written on the business of exchange trading: Confusion de confusiones (1688).66 The
title could not have been more succinct: “confusion of confusions”.
67 For
those interested in the early days of stock trading at the Amsterdam exchange,
de la Vega gives a unique insight into trading strategies and practices that will
look all but unfamiliar to the observer of modern exchanges.68 A few years
later, a report to the British House of Commons (1696) states:
The pernicious Art of Stock-jobbing hath, of late, so wholly perverted the End and Design of Companies and Corporations, erected for
the introducing, or carrying on, of Manufactures, to the private Profit
of the first Projectors, that the Privileges granted to them have,
commonly, been made no other Use of, by the First Procurers and
Subscribers, but to sell again, with Advantage, to ignorant Men,
drawn in by the Reputation, falsly raised, and artfully spread, concerning the thriving State of their Stock: . . . .
69
66 IOSSEPH DE LA VEGA, CONFUSION DE CONFUSIONES: DIALOGOS CURIOSOS, ENTRE UN
PHILOSOPHO AGUDO, UN MERCADER DISCRETO, Y UN ACCIONISTA ERUDITO, DESCRIVIENDO EL NEGOCIO DE LAS ACCIONES, SU ORIGEN, SU ETHIMOLOGIA, SU REALIDAD,
SU JUEGO[] Y SU ENREDO (1688) (Neth.).
67 De la Vega offers two explanations for the title, see id. at 10, 380.
68 One of us is working on a more detailed account of de la Vega’s book.
69 Answer of the Commissioners appointed to look after the Trade of England of Nov. 24,
1696, reprinted in 11 Journals of the House of Commons 593-95 (1803) (Eng.) [hereinafter
Nov. 24, 1696 Answer].
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When, a seven decades later (1764), Scottish economic historian Adam
Anderson (1692-1765) gave an overview of projects that had been undertaken
or planned,70 it was already hard to believe that people had been willing to
invest money in doomed business ideas such as “To make Salt-water fresh,”
“For extracting of Silver from Lead,” “For the transmuting of Quick-silver into
a malleable and fine Metal,” “For importing a Number of large Jack-Asses
from Spain; in order to propagate a larger Kind of Mules in England,” “For
trading in Human-Hair,” “For a Wheel for a perpetual Motion” as well as—even
this real-life comedy had the potential to solicit money—”[F]or an Undertaking, which shall in due Time be revealed.”
71
Two scandals at the beginning of the eighteenth century were world famous: the Mississippi Bubble in France (1720) and the South Sea Bubble in
England (1720). The course of events is similar in both cases: public debt is
transferred to a company (Compagnie d’Occident/Compagnie des Indes,
South Sea Company), which is made attractive to the capital market by granting rights that allegedly promise exorbitant profits overseas. Share prices first
soared and then equally quickly collapsed when the pyramid scheme ran out
of good news and the bubble burst. Following these and other scandals, the
public image of large enterprises suffered for a long time. Even more than
half a century later, Adam Smith (1723-1790), the celebrated philosopher and
economist, criticized with strong words joint-stock companies in general and
the South Sea Company in particular (1784):
“They [sc. the South Sea Company] had an immense capital divided
among an immense number of proprietors. It was naturally to be expected, therefore, that folly, negligence, and profusion should prevail
in the whole management of their affairs. The knavery and extravagance of their stock-jobbing projects are sufficiently known . . . .
Their mercantile projects were not much better conducted.”72
70 2 ADAM ANDERSON, AN HISTORICAL AND CHRONOLOGICAL DEDUCTION OF THE ORIGIN
OF COMMERCE, FROM THE EARLIEST ACCOUNTS TO THE PRESENT TIME: CONTAINING, AN
HISTORY OF THE GREAT COMMERCIAL INTERESTS OF THE BRITISH EMPIRE 291-96 (1764).
71 Id. at 293-95 (No. XI. 4., XXXIII. 3., XXXIII. 5., XXXV., XXXVI., LXIII., XLIII.).
72 3 ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS: WITH ADDITIONS 128 (3rd ed. 1784). Smith included the passages on the jointstock companies for the first time in the third edition. Id. at 107-50. One of us is working
on a more detailed account of this section.
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2. Governmental Restrictions
Shortly after the aforementioned report to the House of Commons
(1696),73 English authorities responded to the widespread scandals with an
“Act to restraine the Number and ill Practice of Brokers and Stock-Jobbers”
(1697).
74 The Act limited the number of brokers to one hundred and introduced a registration system. The famous “Bubble Act”
(1720)75 followed only
two decades later and prohibited a variety of activities and practices that were
believed to support undue speculation. The Act’s impact was rather varying
and remains ambiguous, but the Act was not overturned until one century
later (1825).76 The French legislature reacted to the scandals as well, but less
radically.
77
All these rules do not constitute ‘stock exchange law’ as defined earlier in
this article because they address neither the organization of exchanges nor the
process of trading at them.
78 Instead, they are selective actions against misconduct that happened to take place at the exchanges or in their surroundings, respectively. The main purpose of governmental intervention was typically to protect the fiscal interests of the state; protection of investors was at
best a secondary goal, if at all.
3. Speculation in Quieter Areas
In regions other than England, France, and the Netherlands, the waves of
73 Nov. 24, 1696 Answer.
74 An Act to Restrain the Number and Ill Practice of Brokers and Stock-Jobbers, 1697, 8 &
9 Will. 3, c. 32 (Eng.).
75 An Act for better securing certain Powers and Privileges intended to be granted by his
Majesty by two Charters for Assurance of Ships and Merchandizes at Sea, and for lending
Money upon Bottomry; and for restraining several extravagant and unwarrantable Practices therein mentioned, 1720, 6 Geo., c. 18 (Eng.).
76 An Act to repeal so much of an Act passed in the Sixth Year of His late Majesty King
George the First, as relates to the restraining several extravagant and unwarrantable Practices in the said Act mentioned; and for conferring additional Powers upon His Majesty,
with respect to the granting of Charters of Incorporation to trading and other Companies,
1825, 6 Geo. 4, c. 91 (Eng.).
77 See, e.g., Loi du May 1716 de Édit concernant les lettres ou billets de change, ou autres
billets payables au porteur, reprinted in 21 RECUEIL GÉNÉRAL DES ANCIENNES LOIS FRANÇAISES, DEPUIS L‘AN 420, JUSQU’A LA RÉVOLUTION DE 1789 114-116 (Isambert, Decrusy
& Taillandier eds. 1830 (Fr.); see also Loi du 21 janvier 1721 de Déclaration pour rétablir
l’usage des lettres ou billets payables au porteur id. at 190-91 (Fr.).
78 See supra Part I.B.
532 Virginia Law & Business Review 7:513 (2013)
speculation were less destructive and sometimes hardly noticeable.
On German soil, as the prime example of a quieter area, no scandals occurred that
had the quality or the impact of the great bubbles abroad. This pleasant outcome is a consequence of the less pleasant underdevelopment or backwardness of the German territories at that time, not only from a political standpoint but also in economic and financial terms. Friedrich Wilhelm (1620-
1688), known as the Great Elector of Brandenburg (Der Große Kurfürst), described this poor state of affairs in words similar to those of Luther: “The
whole commerce of Prussia is no good, as the English and Dutch profit and
suck the fat from my country.”
79 The government failed in establishing a
stock exchange in Berlin (1685), and it took another five decades before Friedrich Wilhelm I (1688-1740) successfully launched one (1739). Not a single
German overseas trading company flourished over a longer period; sooner or
later, all failed.80 Even Friedrich II (1712-1786), known as Frederick the Great
(Friedrich der Große), did not manage to establish a prospering company, but
instead had to learn that he had been overly optimistic when he wrote in his
Testament Politique (April-July 1752) as one of the reasons to found the Compagnie D’Emden, a trading company for the Orient, “because it gives people
the chance to increase their capital by twenty or even by fifty percent.”
81
The traditional focus on the developments in Brandenburg and Prussia,
though, has probably to some degree distorted the true picture of the past.
More detailed studies would be worthwhile especially for areas with closer
economic and social ties to the centers of speculation in England, France, and
the Netherlands. An interesting indication that Germans found speculation
perhaps more fascinating than historians later thought are the attempts to
79 “Der gantze Preussische handell dauget nit, als die Engellender Holllender Profitieren u.
saugen mein landt das fett ab,” as reported by Wilhelm Naudé, Die brandenburgisch-preußische
Getreidehandelspolitik von 1713-1806, in 29 JAHRBUCH FÜR GESETZGEBUNG, VERWALTUNG
UND VOLKSWIRTSCHAFT 161, 167 (1905) (Ger.). For Luther’s words, see supra Part II.A.1.
80 For the details, see 1 & 2 RICHARD SCHÜCK, BRANDENBURG-PREUßENS KOLONIALPOLITIK UNTER DEM GROßEN KURFÜRSTEN UND SEINEN NACHFOLGERN (1647-1721)
(1889) (Ger.); VIKTOR RING, ASIATISCHE HANDLUNGSCOMPAGNIEN FRIEDRICHS DES
GROSSEN: EIN BEITRAG ZUR GESCHICHTE DES PREUSSISCHEN SEEHANDELS UND AKTIENWESENS (1890) (Ger.); KATHARINA JAHNTZ, PRIVILEGIERTE HANDELSCOMPAGNIEN
IN BRANDENBURG UND PREUßEN: EIN BEITRAG ZUR GESCHICHTE DES GESELLSCHAFTSRECHTS (2006) (Ger.).
81 “[A]ccausse que Cela procure au[x] particuillers le [] Moyen de placer leur Capitaux au
denier 5, et meme a moitié du Capital d’Interet.” FRIEDRICH DER GROßE, TESTAMENT
POLITIQUE (1752) (Ger.): GEHEIMES STAATSARCHIV PREUßISCHER KULTURBESITZ, BPH,
URKUNDEN III 1, No. 21, at 10, reprinted in DIE POLITISCHEN TESTAMENTE DER HOHENZOLLERN 290 (Richard Dietrich ed. 1986) (Ger.).
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establish two insurance companies at the height of the global speculation in
Hamburg (summer of 1720)
.82 Immediately after the plans to found the two
companies had been released, a lively trade arose with a view to the expected—but not yet issued—shares. The Senate of Hamburg forbade this
trading within a few days (July 19, 1720): “Therefore, the honorable respectable Council has noticed with great astonishment and displeasure, how some
private persons, under the pretext of an insurance company, have on their
own begun to encourage and start a so-called trading in shares, although there
is reason to worry that this will lead to many dangerous and highly disadvantageous consequences, both for the public as well as private persons: Hence,
the honorable respectable Council, to satisfy its magisterial duties, could not
sit still, but found itself compelled to hereby prohibit all such share trading
entirely . . . .”
83 A week later, the Senate rejected the requests to permit the
establishment of the insurance companies and declared them null and void
(July 26, 1720
