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Foreign Hi, I'm Andy Tempte, and welcome to the Saturday Morning Muse. Start your weekend with musings that are designed to improve financial literacy around the world. Today is October 25, 2025. Last week, we discovered how the Dutch East India Company revolutionized equity ownership in 1602 by creating the first permanent joint stock company with transferable shares. This innovation solved the liquidity problem that had plagued investors for millennia. You could now sell your shares to somebody else, rather than waiting for years for a venture to conclude. But transferable shares create a new challenge for us. Where do buyers and sellers find each other? How do they agree on fair prices? And who ensures that transactions are completed honestly? Today we're going to cross the North Sea over to London, where informal trading among merchants would eventually evolve into the formal stock exchanges that define modern capitalism. Now, by the 1690s, London merchants were watching Amsterdam's success with envy. The Dutch had grown wealthy from Asian trade. Trade and their stock market allowed ordinary citizens to participate in that wealth. The English East India Company had been founded in 1600, two years before its Dutch rival. But it had initially operated on the old model of temporary partnerships for each voyage. In 1657, the company finally reorganized along Dutch lines, creating permanent capital and transferable shares. Other English companies followed suit. The Royal African Company, the Hudson's Bay Company, and various mining ventures all adopted the joint stock structure. This created a problem. Dozens of different company shares were now trading, but London had no organized marketplace. Buyers and sellers met haphazardly, prices varied wildly, and fraud was rampant. So what do you think we're going to do? Enter Jonathan's Coffee house, established in 1680 on Change Alley, just blocks from Edward Lloyd's Coffee House, which was becoming the center for marine insurance. As we explored in our insurance series, coffee houses were the social gathering places of the 17th century. Different establishments attracted different crowds. Lloyd's drew insurance underwriters, while Jonathan's became the gathering plays for equity share traders. By the 1690s, Jonathan's had become the de facto stock exchange in London. Brokers, or intermediaries who match buyers with sellers, congregated there daily, calling out prices and negotiating deals. The coffeehouse keeper provided tables and a central location, but the actual trading was entirely informal. If you own shares and wanted to sell, you'd visit Jonathan's and find a broker. The broker would announce your shares were available and listen for interested buyers. Once a deal was struck, both parties would sign a memorandum recording the transaction. This informal system worked for small scale trading, but had serious issues. There were no rules about who could become a broker, no standards for recording transactions, and no enforcement mechanism if someone failed to deliver shares or payment. Now, these weaknesses became catastrophically clear in 1720 with the South Sea Bubble, one of history's first and most spectacular stock market crashes. The South Sea Company had been granted monopoly rights to trade with South America. In reality, though, Spain controlled South America and allowed minimal English trade. But the company's promoters promised investors extraordinary profits from South American gold and silver. The company's shares began rising dramatically on all this hype. From one 28 pounds per share in January 1720, they climbed to 1,050 pounds by June of that same year, more than eight times their January price. The frenzy was extraordinary. People mortgaged their homes to buy shares. Servants quit their positions to become stock traders. New companies sprouted daily with impossible schemes. One company sought capital to develop a wheel for perpetual motion. Now, Jonathan's Coffeehouse was the epicenter of this madness. Crowds packed the establishment, shouting bids and celebrating paper fortunes. Then reality struck. In August of 1720, when the company failed to deliver promised profits, Investors began selling. Prices collapsed to 175 pounds by September, wiping out months of gains. By December of 1720, shares traded below 128 pounds, that original price back in January. Thousands of investors were financially ruined. Now English parliament responded with the Bubble act, restricting the formation of joint stock companies. Any company wanting to issue transferable shares would need a Royal charter or an act of Parliament, which is a difficult and expensive process. This act, like many acts of congress or parliament, it had profound unintended consequences. It made it harder for legitimate businesses to raise raise capital and didn't prevent future bubbles. Speculation, as we'll find out, is a human tendency that no law can fully eliminate. But the South Sea Bubble did convince London's financial community that informal coffeehouse trading wasn't sustainable. Stock markets needed organization, rules and oversight. But in London, this transition actually took decades. Throughout the 18th century, trading continued at Jonathan's and successor establishments. Gradually, traders developed customs like standard trading hours, accepted methods for recording transactions and informal rules about broker behavior. In 1773, a group of 150 brokers formed a subscription club, paying an annual fee for for access to a private trading room, Essentially creating a members only stock exchange. They established basic rules where members had to maintain good reputations. Disputes would be arbitrated by a committee and manipulative practices were forbidden. This was the genesis of what would become the London Stock Exchange, which was formally established in 1801. The exchange created systematic rules for membership, standardized procedures for recording trades and enforcement mechanisms for disputes. This pattern mirrors what we saw with Lloyd's of London in our insurance series, informal gatherings evolving into formal institutions with rules, governance and legal standing. These London innovations, building on the Dutch foundations that we learned about last week, established principles that govern stock markets worldwide today. One, centralized marketplaces where buyers and sellers efficiently find each other. Two, professional intermediaries or brokers who facilitate trading. Number three, standardized procedures for recording and completing transactions. Number four, rules and regulations to prevent fraud and manipulation. Five, membership requirements ensuring professional standards and finally, dispute resolution mechanisms for disagreements. The progression from Jonathan's Coffeehouse to the London Stock Exchange reveals something important. Financial markets naturally evolve from informal to formal as trading volume increases. Informal arrangements work fine when trading is occasional, but sustained activity demands organization, standardization and oversight. Next week we'll discover how the railroad boom in 19th century America brought stock ownership to the middle class and introduced the concept of the market as a measure of economic health. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte. This is the Saturday Morning Muse. You can find us on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public good with your friends, your neighbors, your colleagues and maybe a family member. The show is produced by Nicholas Tempte. We'll see you next time on the Saturday Morning Museum.