Law, Lawyers, and Self-Governance during the Heyday of the London Stock Exchange

By Weidemaier, W. Mark C. | Law and Contemporary Problems, Fall 2019 | Go to article overview

Law, Lawyers, and Self-Governance during the Heyday of the London Stock Exchange


Weidemaier, W. Mark C., Law and Contemporary Problems


I

Introduction

During the nineteenth and much of the twentieth centuries, the London Stock Exchange (LSE) was arguably the most important economic institution in the capitalist world. (1) Together with other major stock exchanges, it directed enormous flows of capital from investors in rich nations to firms and governments around the globe. By the First World War, nearly one-third of all securities, whether issued by public or private entities, were listed on the LSE. (2) Like other exchanges, the LSE also was self-governing. (3) Its membership criteria determined who could trade, its rules and regulations determined the form of transactions, and its governing committees or private arbitrators--not the courts--resolved disputes among members. The LSE enforced its rules and decisions not by legal coercion, but extralegally, by suspending or expelling members who refused to comply.

In these ways, the LSE resembled other merchant communities that enforce agreements in accordance with specialized rules and through extralegal rather than legal sanctions. Private legal systems of this sort have attracted much academic attention, resulting in a large and interdisciplinary literature in law, economics, history, sociology, anthropology, and beyond. (4) This literature has produced important insights about how private legal systems operate and why some economic communities opt for private over public enforcement. Perhaps the most fundamental insight is that, in some transactional settings, contracts are more secure when enforced extralegally. (5)

The LSE is a straightforward example of this benefit. LSE members engaged in transactions, such as time bargains and options, (6) that English law deemed unenforceable or outright prohibited. (7) Until 1860, Barnard's Act outlawed forward transactions unless the seller retained the shares until closing. (8) The Gaming Act of 1845 declared contracts "by way of gaming and wagering" null and void, (9) and Leeman's Act of 1867 invalidated contracts speculating in bank shares. (10) These and other laws meant that LSE members could not rely on the English courts to enforce many contracts. By resolving disputes privately, and threatening non-compliant members with expulsion, the LSE assured that members would honor bargains.

However, the LSE does not merely illustrate a private legal system in action. Examination of its practices also reveals a gap in the literature and helps to fill it. Studies of private legal systems generally examine how members enforce bargains and thus focus attention on exclusion and other extralegal mechanisms. Law and legal actors recede into the background. Yet a rather different picture emerges if we shift our attention away from the problem of "enforcing agreements in exchange" (11) and toward sources of friction between the private legal system and the state itself. A community that aspires to self-governance must do more than facilitate trade. In many cases, it will also have to navigate a constantly-shifting relationship with the state itself.

Certainly this was true of the LSE. As economic historian Larry Neal has written:

   [T]he particular form of self-regulation of the London Stock
   Exchange was shaped by the peculiarities of English common law and
   constrained ultimately by statute and the ever-present threat of
   additional legislation. The influence of statute and judicial
   constraint ... [led to] various responses by the members of the
   self-regulating London Stock Exchange ... The relationship between
   formal regulation and informal regulation of the London Stock
   Exchange over time was therefore much more complex than simply
   reflecting a common law society governed by central government.
   (12)

To put the point a bit differently, the LSE did much more than ensure that members would honor bargains. Much of its work was devoted to creating and maintaining room to operate with minimal state intrusion. …

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